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Bridging Loan: What can you use them for?

Bridging | 20 November 2021

The superhero of financing

Bridging loan finance is an incredibly versatile tool for investors. They are all about flexibility and fast turnaround times. For anyone needing a bridging loan, speed is always of the essence and it can often feel like a bridging loan is ‘coming to the rescue’.

There are three specific needs that people have, which point them in the direction of using bridging loans. Let’s look at each of these key areas in turn.

Preventing chain breaks

Buying and selling houses can be a stressful time, mostly because of the risk of a chain breaking down during a property transaction. If you are purchasing a property, and relying on the proceeds of a property sale to do so, your purchasing funds are suddenly no longer available if your property sale falls through. This means that you can’t complete on the purchase, which delays the onward purchase, and the chain breaks down.

Finding another buyer for your property can take months, during which time you could lose your dream home as your seller can’t afford to wait for you to sell your house all over again, and they instead find someone else who’s ready to step in and buy their house instead of you. After all, they can’t afford to risk losing the property they’re hoping to move to when their property is sold.

This is where a bridging loan can step in to fill the breach. In fact, bridging loans were originally designed as a solution to this very problem. Taken out on a short-term basis, a bridging loan will cover your new property purchase to enable you, and everyone else in your chain, to complete on your properties as planned, and prevent the chain from breaking down. A huge relief all round.

Buying an auction property, or a property that needs refurbishment to make it habitable

Raising your paddle at an auction, bidding for a property costing tens or hundreds of thousands of pounds, is not for the faint hearted. However, it can also be a fantastic opportunity to grab a bargain and make a substantial profit.

Timings are crucial with a property purchased at auction. When the hammer falls, you are legally committed to buying that property and you exchange contracts that very day. In most cases, you then have just 28 days to complete the sale or you risk losing your entire deposit.

This is where bridging loans come into their own. Bridging loan companies are used to working at speed and, for this reason, bridging loan finance has become very popular with property investors as it is generally a lot quicker to arrange than a mortgage, making it the ideal product for property investors looking to pick up a bargain at auction to renovate and rent out, or to sell on at a profit.

In some cases, because of the fixed 28-day turnaround time, property purchasers will use a bridging loan facility on an auction property for a very short period of time, whilst they arrange their longer-term mortgage financing. This is often the case if there is no work to be done to bring the property up to a habitable, and therefore mortgageable, standard.

If, however, the auction property, or any other property for that matter, is classed as uninhabitable, a bridging loan is usually the only option for financing the property purchase.

Most mortgage lenders are not as flexible as bridging loan companies and they will not provide a mortgage on an uninhabitable property.

Whilst most mortgage lenders want to know that they are investing in a property that they could sell or rent straightaway if they need to foreclose and recoup their investment, this isn’t a concern for bridging loan companies; this is what they are there for. They are fully aware that the property may not be habitable, and it is not an issue for them or their business model.

If you are purchasing a property that needs extensive ‘TLC’ it would be considered ‘uninhabitable’, due to not having a fully functioning kitchen or bathroom, for example. Note; running water doesn’t count as habitable. The kitchen and bathroom have to be of a good enough standard that makes it fit for renting out or selling on.

There are many other reasons that a mortgage company would classify a property as uninhabitable, including being derelict, not weatherproof or secure, having structural problems like subsidence, lack of a damp proof course, wall tie failure and so on. It could have non-standard construction, ie be a timber, cob or corrugated iron building, have severe damp, dry rot, wet rot, a history of flooding, Japanese knotweed. The list goes on.

An uninhabitable property may be advertised on the open market as ‘cash buyers only’. However, you’ll be glad to know that this investment isn’t off limits to you if you don’t have £100k sitting in the bank. Bridging loan finance will do the job nicely.

The investor may need the bridging loan for a longer period if the house is uninhabitable and therefore unmortgageable, to give them time to bring the property up to a mortgageable standard and enable them to apply for a residential mortgage or a buy-to-let mortgage, as appropriate.

Cashflow for investors

Property developer entrepreneurs always have their ear to the ground, looking for the next property they can pick up, hopefully below market value, to renovate and rent or sell on.

Again, it’s a process where timing is everything and getting finance in place very quickly can make or break the deal.

Larger-scale investors are usually juggling multiple projects simultaneously. Having cash tied up in one or more current projects could prevent them from seizing an opportunity if a good property deal comes up when free funds aren’t available.

The quick-to-arrange, short-term flexibility that a bridging loan provides, means that the investor/developer can raise the funds they need to go ahead with a new purchase or renovation project whilst still working on their existing project/s.

They are free to maximise their investment and profit potential without waiting what could be months or even years to free up their capital from other projects before moving on to the next. They can manage multiple property projects at the same time.

Whatever you need your bridging loan for, you can compare bridging, commercial and development loan rates right now, using our helpful, easy to use, free online optimiser tool.

Or, get in touch with our personable and expert team at Propp. We would be very happy to help with any query or request that you may have. We look forward to hearing from you.

Call      01489 346 788

Email   hello@propp.io