Since the 1960's, there has been a specialised market dealing with short-term finance and bridging loans for investors and homeowners. Bridging loans can provide a quick financial solution to cover cash shortfalls or fund property sales. Below is a guide to how they work and the different types available.
What is a bridging loan?
A bridging loan is short-term finance designed to be arranged quickly so funds can be released within a matter of days. The loan â€˜bridges the gap' between longer-term funding, like a mortgage and can help to fund renovation projects, property purchases and commercial deals.
Types of bridging loans
Bridging finance - This helps raise capital to fund any purpose, including tax and VAT bills, holidays, deposits and refurbishment costs.
Commercial bridging loans - If you're looking to improve cashflow in your business, need to update stock or you want to buy commercial premises, a commercial bridging loan can help. There is a fast turnaround so you don't need to miss out on investment deals.
Buy to let bridging loans - This can help if you're a landlord or investor looking to purchase rental property but can't raise the required funds in time. A buy to let bridging loan can also fund property purchases at auction or cover renovation costs if the property is in need of refurbishment or has to be converted in separate dwellings.
Renovation finance - a loan to fund refurbishment or development projects, no matter how big or small. Once work has been done to get the property to a good standard, you can apply for longer-term funding, like a mortgage.
Buying property at auction-Usually, there is just a 28-day time frame to complete a property sale at auction. Therefore, securing a mortgage in time can be tricky. A bridging loan can fund the purchase until a mortgage can be arranged.
Buying uninhabitable property - For property that is in poor condition and deemed unfit for occupation, it is not possible to get a mortgage. A bridging loan will cover the cost of renovation so you can do it up properly. You will then be in a position to arrange longer-term funding.
The difference between open and closed bridging loans
When deciding what type of loan you want, you'll likely come across the terms â€˜open' and â€˜closed' bridging loan. You can take out an open bridging loan if you do not have a definite exit strategy in place to pay it back. This can happen, for example, if you can't secure a mortgage until the property has been renovated. A closed bridging loan is available to you if you do have a repayment plan in place, for example, contracts have been exchanged on a property sale.
Use a broker
To get access to the best deals and rates, a whole of market broker can search the market to find a bridging loan to match your requirements. They can also review your individual situation to tailor short-term finance to your needs and can make sure the loan is suitable and affordable for you. If you have any questions about the process, they will be happy to help and provide assistance wherever they can.
Written by Anna-Lisa Searle, a writer for TurnKey Bridging. Anna-Lisa is interested in the financial market and likes to tell it straight, without the complicated jargon.