What is Bridging Finance?
Bridging finance – often referred to as a bridging loan or bridge loan – is a short-term secured loan. Its purpose is to act as a “bridge”, giving you immediate access to the funds you need while you wait for money to become available from something else, such as the sale of a property or a remortgage.
Bridging loans are designed to be a form of short term finance only, and most providers will only offer them for a maximum period of 12 months.
Bridging finance is secured against a property. You can have either a “first charge” loan, which is secured against a property that is currently mortgage-free, or a “second charge” loan, which is when you the loan against a property that is already mortgaged (with the current mortgage lenders consent, of course).
One of the most significant advantages of bridging finance is that it’s speedy to arrange. Traditional mortgages can take months to process, whereas bridging loans can be arranged in a matter of weeks, making them ideal for urgent financial needs.
Also, unlike a standard mortgage, the monthly payments can be rolled up and added onto the mortgage, meaning that you don’t have to make any monthly payments towards the debt. Which is great for cashflow purposes, but it’s important to remember that the borrowing amount – and therefore the interest that you pay – would be increasing each month that you have the loan if you chose to do this.
Common Uses of Bridging Finance
Property Transactions: Property buyers often use bridging finance to buy a new property before the sale of their existing property is finalised. This prevents them from missing out on their desired purchase while waiting for their old property to sell.
Property Development: Developers can use bridging loans to fund renovations, refurbishments, or new construction projects on properties which traditional mortgage lenders might not be willing to lend against. Once the project is complete, they can refinance with a traditional mortgage or sell the property.
Auctions: Bridging finance is popular among buyers at property auctions who need to complete the purchase quickly, or because the property might not be acceptable to mainstream lenders due to its condition.
Chain Breaking: In property chains, where multiple parties are involved in buying and selling properties, a delay in one transaction can disrupt the entire chain. Bridging finance can help maintain the flow of the chain by providing temporary funding.
Is Bridging Expensive?
Bridging finance often comes with higher interest rates when compared to traditional long-term mortgages, reflecting the shorter repayment period and higher risk involved. Additionally, borrowers should consider other associated costs such as arrangement fees, legal fees, and valuation fees.
Bridging might look expensive compared to regular mortgage products, but it’s important to consider what it helps you achieve. If it helps you secure the home of your dreams, or makes that building project possible, then like any other cost when buying, selling or refinancing, it’s just something to factor in when weighing up the overall financial viability.
Due to the short-term nature and relatively higher costs, it’s important to consult with a mortgage broker, who can carefully assess your financial situation and weigh the benefits against the risks before opting for bridging finance.
If this has got you thinking, we’d be delighted to help. Get in touch and we’ll talk you through your options, or sign up to our monthly newsletter, to keep your finger on the pulse.
Helen Peel – 24th August 2023