Using Bridging Finance For A House Purchase
Cash is king and this is no more true today when buying a property. If you are in competition to buy a house and you are relying on the sale of an existing property to provide the funds then you may find you up against it when it comes to the competition. So how do you make sure you are in pole position when it comes to securing your dream property?
One way to make things happen fast is by using bridging Finance. Bridging finance is a short-term funding option. It is primarily used to ‘bridge’ a gap in funds, for a set time. Bridging finance is a short term loan, usually for 12 months or less, that can be used by individuals and businesses for any purpose, including commercial and residential property, until some form of permanent funding becomes available.
Residential bridging finance is secured against either the home you are buying or your existing home or both to facilitate the transaction when there is a gap between the sale and completion dates in a chain.
One of the main reasons the bridging loan differs to a regular loan is the time frame. It is generally much faster to apply for and receive a bridging loan; a regular loan can take months to complete.
What is bridging finance used for?
Bridging finance is designed to help in a number of different ways:
- To help people to purchase a property before they have sold their existing home. This allows the borrower freedom to continue with the purchase while also having the flexibility to sell the property when convenient
- It’s very useful for property developers as they are able to use the loan to purchase the space and make the necessary refurbishments before selling the property to pay off the loan
- Bridging finance can also be useful for renovations and home conversions
- Using Bridging Finance at a property auction can be incredibly useful as you’re often required to put down a large deposit within a short space of time. If you haven’t sold your existing property yet, bridging finance can provide you with the freedom to purchase the property rather than lose it to someone else
- If there’s a need to complete the transaction quickly. This might include property developers, who often have the opportunity to secure a great deal if they can complete quickly
- If someone would like to purchase an uninhabitable property as traditional lenders will not lend on a property that does not have standard living facilities, such as a kitchen or bathroom, and running water
- It is very useful for people who are downsizing their property and therefore, don’t need a mortgage. Bridging finance allows people to buy a property before their existing property is sold. Allowing them the option to move faster
What does it Cost
While bridging finance can be very convenient, it’s not necessarily the cheapest way to borrow.
- Bridging finance comes at a high interest rate, normally in the range of 1-1.5%, which is higher than other bank loans and mortgages
- Fees for bridging loans can be expensive. Fees are usually in the region of 1.5% and are normally taken out of the loan
- There is also the possibility of broker fees, valuation, legal fees and early exit fees
While there are many benefits to bridging finance, make sure it’s right for your situation before applying as you will be able to find a cheaper deal by using a regular loan.
Fixed and Variable Bridging Finance
Similar to mortgages, bridging finance can be provided at a fixed or variable rate.
- A fixed rate means the same interest rate is applicable across the term of the loan, so each monthly payment will stay the same
- A variable rate means that the interest rate may change, so your bridging loan payments could go up or down
During the application, you may be able to choose to ‘roll up’ your interest which means you don’t have to pay interest every month but instead pay the interest at the end of the term. This may suit borrowers who cannot make the monthly payments.
You can also choose to ‘retain’ the interest from the loan amount in advance, to cover the interest payments. However, interest will still be charged on this retained amount.
How do I get it?
From any reputable bridging finance broker with a proven track record with the following accreditations:
Once you’ve selected a regulated bridging finance broker, you can usually apply online by completing a form, although some providers may require that you come in to see them. Aside from your personal details, information they need could include:
- The purpose of the loan
- The property details on which the bridging loan will be secured
- Loan amount
- Term of the loan
- A detailed explanation of how you intend to repay the loan (sale of a property etc.)
- How much finance or mortgage you have outstanding
What can Bridging Finance offer?
- A straightforward, short-term lending facility that can be obtained faster than a regular bank loan.
- Options that can solve financing requirements on all types of residential and commercial property transactions
- Another option when high loan-to-value (LTV) mortgage finance is not available
- The sum of money you’re entitled to will depend on your personal circumstances and those of the lender but borrowing is typically between £25,000 – £10,000,000. They can also offer two kinds of repayment terms:
Closed bridge: This is when the date of the loan repayment has been confirmed. This would suit a borrower who has a known date of when they will receive their money, i.e. though the sale of a property and so know when they will be able to pay off their bridging finance.
Open bridge: The open bridge will allow a proposed time period with a clear cut-off point when the loan will have to be repaid but there is no specific date. This is better for people who know they will come in to money at a certain time but can’t commit to a fixed date.
The lowest rate of interest and an interest payment plan to suit you. Bridging loans often come at a high interest rate and with several other fees attached. Make sure you research lenders to find one to suit you
Consider the amount of time you’re borrowing for, if you need a longer term option then bridging finance may not be for you
Look for a lender that has worked on similar projects as yours. This can speed up the borrowing process
Bridging finance has grown in popularity due to its flexible finance options, however, there are still many potential borrowers who aren’t aware of how useful bridging finance could be for their needs.
This type of finance is now used around the UK for a large range of investment opportunities. This includes: buying property at an auction, commercial development, property refurbishment and developing properties to sell on.
Many lenders are now offering bridging finance from smaller amounts to much larger amounts meaning borrowers are able to utilise them for a vast range of short-term projects.
While interest rates can be higher with bridging finance and overall they aren’t necessarily the cheapest option, they can be incredibly useful in a range of business and property projects which makes them a valid option for a growing number of people for a vast range of purposes.
Your home may be repossessed if you do not keep up repayments on your mortgage.