Bridging Loans Explained

Bridging loans can be used for almost any purpose so long as there is enough equity in the property.  The UK Bridging Loan market is estimated to be worth £2.5 billion and the demand for bridging loans is believed to be growing by 25% year on year.  Bridging finance can be made available for many purposes, the obvious one being to bridge the gap between the purchase of a new property and the sale of an existing property.

Once regarded as the funding solution of last resort, bridging finance has under gone something of a transformation over the last few years. It is no longer the preserve of the desperate house-mover but a valuable tool for savvy property investors and developers looking to secure a bargain.

The growth in the number of bridging lenders means that there is more competition, which in turn has led to more competitive rates and more innovation, particularly around the issue of exit fees and default rates. Many of the more well established lenders have been forced to change their business practices to keep up with this evolving market. Thankfully the practice of hiding crippling terms in small print will no longer be tolerated in a market dominated by brokers. .

We all know how frustrating it can be when a long chain suddenly breaks and these at the top look like losing their dream home. but there are plenty of other instances when bridging finance might be appropriate. For example an auction purchase which only has 28 days to complete, or a business which finds itself needing to find a substantial amount of tax money quickly.

Bridging Loans are often used for:

Auctions:
When purchasing property at auction the borrower usually has a deadline of 28 days to complete the process.  Although it is not uncommon for borrows to be told that it is possible to complete purchase using conventional finance in practice the funding is rarely available in time.  Having paid a 10% deposit it is vital that completion takes place within the deadline.  This is where bridging loans are most useful, once the valuation has been received legal completion can often take place within a few days.

Buying Property at Undervalue:
Approaching a mainstream lender with a proposal to purchase a property at under value is pointless as they will only consider the purchase price.  However bridging loans can be raised against the value of the property and not the purchase price.  This means that theoretically it is possible to purchase a property at discount without putting any money into the deal.

Debt Relief:
Business people often get into financial difficulties due to cash-flow problems.  These can be a result of trading problems or even unexpected tax demands, where there is enough equity in a freehold property bridging loans are an ideal solution.

One aspect of bridging loans which have caused the most concern is the perceived lack of transparency, many borrowers had complained that the rate
originally offered had been subsequently withdrawn and replaced with a much higher rate. The lender’s would counter this claim by blaming the customer or broker for not supplying accurate information at the outset.  Therefore It is important to make sure that the terms of a bridging loan are explained in clear english, worth remembering that just chasing the headline rate could leave a borrower in future trouble.

We would love to hear you views on bridging loans, good and bad!

3 responses to “Bridging Loans Explained”

  1. Iv recently entered the property development market and i am looking for finance for the refurbishment. Would require £15000. is a bridging loan the right solution for my circumstances?

    Thank you.

  2. Hi Bendan,
    You may struggle to get a bridge at £15,000 as most lenders start at £25,000.
    The reason for £25,000 goes back to the limits under the consumer credit act, however even though the limit has been lifted a lot of lenders still seem to prefer loans over £25,000 (probably not enough money in it otherwise).

  3. I have a home just now worth 250 000, I have 50 000 to pay off, I am debating wheter to start building our new home at a cost of 310000, I have already bought the land at 145 000, would you advise keeping my first home and renting till market picks up, I am in no hurry to sell

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