A bridging loan is a short-term finance facility that can be used to ‘bridge’ a gap in finances before a cash lump sum becomes available or a longer-term facility can be arranged. It can be used for any reasonable and legal purpose, but bridging finance is usually used in property transactions.
To work out whether a bridging loan suits your finance requirements, as well as a guideline of the costs, use an online bridging loan calculator.
This article will outline five common ways that bridging loans are used.
Purchase before sale
This is probably one of the most common reasons bridging finance is taken out – to buy your next property before selling your current one. This may be because your dream home has come on to the market but you haven’t found a buyer for your existing property, or you had one but they had to pull out.
The bridging loan would be secured against your current home (providing there is enough equity) and used to purchase the new property. The loan will then be repaid when you sell the current property or are able to take out a mortgage to refinance the loan.
A bridging loan can be used to fund all sorts of property renovations, from simple light refurbishments on an existing property to building a home ground-up. You may want to renovate your home or an investment property to increase the value before sale, or simply to improve living conditions.
Repayment for the bridging loan would come from selling the property once the work has been done, or from re-mortgaging once the property’s value has increased.
Purchasing a property at auction
A bridging loan can prove very useful if you’re planning to buy a property at auction. When you place a successful bid at a property auction, you will be required to put down a 10% deposit that day, then the full purchase must be completed within a further 28 days. Some mortgages can take a long time to arrange, especially if any problems or complications arise, which could mean you end up facing big penalties if you miss the 28 day deadline.
Bridging loans can be set up very quickly, sometimes in as little as 2 days, which means you can complete the purchase in plenty of time, and the mortgage will be used to refinance the bridging loan when it has been arranged.
Buying an unmortgageable property
Some properties are deemed as ‘unmortgageable’ by lenders. This means the property is unsuitable security for mortgage lending and this could be because it has no kitchen or bathroom, there is only a short amount of time left on the lease, or it is unsafe or uninhabitable for any reason.
Bridging loans can be secured on any type of property, in pretty much any condition, so a bridging loan can still be used to purchase properties where a mortgage can’t. The idea behind this is to use the bridging loan to purchase the property and to make the required improvements, then it can be repaid with the mortgage once it’s deemed to be suitable security.
Inheritance tax and probate issues
When you need to deal with inheritance tax and probate, sometimes large funds are needed to release charges on a property, pay bills or tax, or to pay off beneficiaries. In these circumstances, most people turn to selling a property in the estate to produce the lump sum required. The problem with doing this, however, is that there is usually a time limit as to when certain payments needs to be made so you may be pushed into a ‘forced-sale’ situation, like an auction, where you may not achieve the best price for the property.
So instead, a bridging loan can be secured against the property (providing there is enough equity) and used to make any required payments, giving you more time to sell the property for its full value.