What can I use a bridging loan for?
When bridging loans were first introduced in the UK they were solely intended to help prevent chains breaking during the home move process, as outlined below. Today there are a whole host of scenarios in which bridging finance is used by property owners.
Preventing chain breaks
You’ve got your heart set on the new property you’ve found. The price has been agreed and you’re desperate to move in. However, the purchase of your current home has fallen through. You’ve been able to find another buyer but it’s going to take weeks before they’re in a position to complete on the purchase of your place. In this scenario you could consider using a bridging loan to buy a house, with the finance being quickly put in place giving you the short term mortgage that is needed to allow you to complete on your dream purchase without risking it falling through. Then, once the sale of your current place has completed you can pay off the bridging finance.
Buying an auction property
If you have successfully bought a property at auction you will often have just 28 days to complete on the transaction. You will have paid 10% deposit on the day of the auction and are legally bound to pay the remainder in the pre-determined timescale (we have occasionally seen auction lots with even less than 28 days to complete). If you don’t hold the remaining 90% required in cash then you either need to find a rich relative or need to arrange some form of short term property finance.
There are two main reasons why quick bridging loans are used for auction purchases. Firstly, they are typically much quicker than traditional mortgage applications. Unlike high street banks and building societies, bridging lenders are geared up to offer loans as quickly as possible, often in a matter of days. Secondly, auction properties are often in a condition which a traditional lender would not agree to lend upon. Again, bridging lenders are far more flexible and willing to lend on property that needs light or even major renovation works.
Cash flow for busy property investors
We often work with property investors that are juggling their finances because they are managing multiple projects, or are waiting on projects to complete to fund the next project. Sometimes investors find a property that they’re determined to purchase, either privately or at auction, but need to buy some time to release equity from their other properties. The short term flexibility that a bridging loan provides means that the investor can raise the funds to press ahead with the new purchase or renovation works. Bridging finance for developers and investors is a reliable way of seizing opportunities such as below market value properties that come up at auction, where speed is of the essence.
Business bridging loan
A business owner may be asset rich but needs some short term capital to pay invoices, pay for stock, or buy equipment. A business bridging loan can help the business stay liquid and ultimately be more profitable. However, a clear strategy to repay the bridging finance is important in every scenario, not least in this business bridging loan example.