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As the property market continues to recover, different types of bridging finance – short-term loans that make it easier to buy a property – are becoming more and more popular.
What is Bridging Finance?
Bridging finance typically takes the form of a very short-term bridging loan. The term might be for 12 months, or even less. A common scenario would be getting a bridging loan to pay for a property bought at auction. It allows you to secure title to the property then take your time setting up a favorable mortgage.
However, individuals and businesses of all kinds use these loans to keep a positive cash flow until some kind of funding or long-term financing comes through.
Types of Bridging Finance
There are two main categories of Bridging Finance: Closed Bridge Loans and Open Bridge Loans. Let’s look at both in a bit more detail.
Closed Bridge Loans are a type of loan where there is a set repayment date. This could be most useful when the borrower is selling one property or asset to pay for another but needs to pay for the new property before they can close on the older one. The sale of that property or asset repays the bridging loan.
Open Bridge Loans do not have a pre-set date for repayment. The lender will usually insist on a specific ‘exit plan’ from the borrower, and there will always be a clear deadline by which time the loan must be repaid. Before that date, though, the repayment date and terms are usually flexible.
How is Bridging Finance Used?
Bridging finance sees use in a wide range of commercial and residential property transactions. They are taken out by buyers of all kinds, including property developers and home builders who need cash to begin a project, investment firms who need to secure land or begin a project before they can get good terms on a mortgage or by landlords, property converters and individuals who need to buy their next property before vacating their current home or rental.
Bridging finance can be used outside of the property industry as well. Sometimes businesses need to settle an urgent obligation, meet a tax liability or to take advantage of a fleeting opportunity but don’t have time to arrange a long-term loan at favorable rates. It is often more effective to get the cash through a short-term bridging loan and then take their time negotiating with their lender of choice.
How Does Bridging Finance Work?
Almost exactly like a regular property or business loan, except for the time involved.
Long-term financing is a complicated process, and the deal can take months to be agreed and completed. This is important, as it defines a financial relationship that might last for decades. Every aspect has to be perfect for both parties.
Bridging finance, on the other hand, is all about speed. Many bridging loans can be completed in 24 hours, allowing the borrower to take advantage of an opportunity, pay for a property bought at auction or meet some other pressing obligation. They can then take the months that may be necessary to haggle about a more traditional financing solution.
There are 10 stages to the process.
1) The buyer explains the situation to the lender, detailing the deal, the reasons why they need the loan, how that loan will be secured and how they intend to repay it.
2) The lender is given proof that the property is real, that a purchase has been agreed, and that a specific price is to be paid for it.
3) The lender drafts an Offer Letter. This will state the agreed terms and the conditions that must be met to obtain the bridging finance.
4) The lender will often send out a valuer to report on the property. The valuer will typically communicate directly with the borrower's solicitor.
5) The borrower’s solicitor then makes sure the borrower understands the terms and conditions of the bridging finance product fully.
6) The Borrower signs the agreement.
7) The lender releases the funds to the borrower’s solicitor.
8) The solicitor releases the funds to the borrower.
9) Interest is paid, typically either on a monthly basis or as part of the final repayment.
10) On or before the agreed time, the borrower makes full repayment to the lender.
The whole thing usually takes between 7 and 28 days for the borrower to get the money, and repayment within one year.
How People Use Bridging Finance
Bridging finance, especially short-term loans, are often used to quickly secure properties. The need to do so quickly might arise because there has been some disruption to a ‘property chain’ purchase because a builder needs funds to construct or renovate a property or for several other reasons.
One of the most common reasons to seek out bridging finance for individual investors or homeowners is because they have bid for and won a property at auction. If you buy a property at auction, you will typically be required to pay at least a percentage of the purchase price very quickly indeed. The exact time will be a term of the auction contract. A short-term loan allows the buyer to do that, and to arrange a long-term mortgage in the normal fashion.
How Has Bridging Finance Changed?
Bridging finance wasn’t always so common. Once it was a specialty financial product which was rarely used, and almost never used by private individuals.
That is no longer the case. Today almost every major lender offers one or more types of bridging finance, and newer types of bridging loans appeal to a wide range of borrowers. Bridging finance today supports both commercial and residential property purchases. They make auction purchases approachable for individual investors and smaller companies and are often employed in renovation or redevelopment deals.
In part, bridging finance has become common because there is a growing sense of confidence about the housing market and its future. The country is well along in its financial recovery, and the ever-growing demand for new homes has fuelled massive investment in housing developments and the buy-to-let market.
How Much Can One Borrow With Bridging Finance?
That, really, is between you and your lender. It will depend on your situation, your assets, your income and what will be securing the loan. Most important will be the cost of the property or asset you are buying. This is because, just like in a mortgage, that property also secures the loan. So if you were to fail to pay, the lender could repossess it.
However, there are some rules of thumb. Few lenders offer bridging finance products for less than £30,000. Similarly, only a few specialised lenders will offer bridging loans for more than £2,000,000 – though as property prices rise, even these large-scale bridging finance agreements are becoming more common.
So now you know what bridging finance is, what it does, and how you can use it to help get the home of your dreams or to overcome a short-term cash flow disaster.
UK Bridging Loans are one of the UK’S leading bridging loan brokers and can search all of the loans on the market to source the perfect deal for your circumstances.
Contact us now to discuss your proposal and we can assure you of the very best advice and service, call us now 0800 138 6001 or use the contact form on this page to compare loans.
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