What Can A Bridging Loan Be Used For?

You've found your new home, but still not sold your old one. You don't want your purchase to fall through, perhaps someone has mentioned a bridging loan, and that has left you wondering, what can a bridging loan be used for? Is it the solution to your property chain?

In this insight, we review the uses of bridging loans and how you could consider using one to "bridge the gap".

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Key Takeaways

• A bridging loan can bridge the gap between needing cash and selling assets.
• Bridging loans can be used for buying property at auctions, broken property chains and even to re-finance development loans.
• In order to qualify, you must have a suitable exit strategy. That is a way to pay back the loan.
• Bridging loans provide quick access to funds, but can come at a high-interest rate.

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What Can A Bridging Loan Be Used For?

A bridging loan can be used to finance lacking cash flow If you need to make a large purchase, such as a house. It is suitable if you cannot sell assets in time to release the cash.

Bridging loans help to bridge the financial gap between two situations. For instance, when you want to buy a new home but haven't sold your current one yet. It provides temporary funding until the sale is complete.

Bridging loans are commonly used in property transactions, but they can also be arranged whenever there is a time gap between needing to make a purchase and obtaining funds.

They can also be used if you're working or retired.

Here are some situations where bridging loans are often available:

Buying a new home before completing the sale of your existing one

This allows you to move into the new property without waiting for the money from selling your old property. If you are building a property to let, you may want to consider using a bridge-to-let mortgage. You can also arrange a bridging loan for downsizing if you want the benefits of not waiting on a sale before finding your new home.

Purchasing a property at an auction

Some auctions require a quick turnaround, typically within 28 days. A bridging loan can be the fastest solution to complete the purchase.

Financing home improvements

You can use a bridging loan to fund renovations and increase the value of your property before seeking long-term financing.

Completing home improvements in your new property while selling your old one

This allows you to move into your new home once all the work is finished.

Bridging the gap between unexpected costs

Bridging loans provide a temporary solution to bridge the financial gap in unexpected situations (like house repairs) while you wait for permanent financing, allowing you to meet your immediate needs while long-term funding is arranged or a necessary transaction completes.

Buying Land whilst Changing the Category

You can get a bridging loan to buy land whilst you wait for the land status to be changed. When the status has been changed, you can opt to clear your bridging loan with your land mortgage.

Can You Use a Bridging Loan to Buy at an Auction?

If you are planning to buy a property at auction and do not have the necessary funds available upfront, you may be able to use a bridging loan to cover the purchase price and any related fees. This can allow you to participate in the auction and potentially secure a property that you might otherwise not have been able to afford.

Bridging loans for Modern Auctions

At a modern auction, if your offer is accepted, you would not need to exchange contracts right away.

Instead, you pay a reservation fee to hold the property, which you can't get back if you decide not to proceed to buy it. The fee is usually a percentage amount of your bid.

After the auction, you have 56 days to exchange contracts and finish the purchase, which gives you more time to raise a mortgage or other funding. It would be possible to avoid needing a bridging loan at a modern auction.

Bridging loans for Traditional Auctions

At a traditional auction, you pay a 10% deposit, exchange contracts, and then have 28 days to complete. It is more likely you would need a bridging loan at a traditional auction

Auctions can be tricky, you might find a great deal, but you need the financing prepared and can always end up being outbid.

Is a Bridging Loan Worth It?

Whether a bridging loan is worth it depends on your specific situation and needs. Here are some factors to consider when evaluating the worthiness of a bridging loan:

Urgency

If you have an urgent need for funds to seize a time-sensitive opportunity or address a pressing financial requirement, a bridging loan can provide quick access to the necessary capital. In such cases, the convenience and speed of a bridging loan may outweigh the associated costs.

Profit potential

If you are using a bridging loan for a property transaction, consider the potential profit or benefits you may gain from the purchase or investment. If the financial gain outweighs the costs of the bridging loan, it may be worth it in the long run.

Financial feasibility

Assess your ability to comfortably manage the repayments of the bridging loan. Consider your income, expenses, and the impact of the loan on your overall financial stability. Ensure that the repayment plan is viable for you.

Alternative options

Explore other financing alternatives and compare their terms, costs, and feasibility with a bridging loan. It's essential to evaluate whether there are more cost-effective or suitable options available to meet your needs.

Professional advice

Seek guidance from financial advisers or mortgage specialists who can assess your specific circumstances and provide personalised recommendations. They can help you analyse the costs, benefits, and risks associated with a bridging loan and determine if it aligns with your financial goals.

Impact on Mortgage Application and Credit Score

If you are buying a house, applying for a bridging loan can have an impact on your mortgage application and credit score. Talk with your mortgage adviser upfront before proceeding with an application for new credit.

Bridging Loan Exit Strategies

Having a clear exit strategy is crucial when applying for a bridging loan. It is an essential component of your loan application, and many lenders require it. An exit strategy can be as simple as planning to remortgage and refinance the loan.

To provide evidence of your exit strategy, you may need to submit your mortgage agreement in principle if you plan to refinance. In cases where your strategy involves selling the property, a feasible valuation would be necessary as supporting evidence.

If your exit is a remortgage, it helps to know roughly what that longer-term mortgage would cost each month. You can use the calculator below to estimate the repayments on the mortgage you plan to refinance into once the bridge is cleared:

Some lenders may accept evidence of your investments as a viable exit strategy.

It's important to note that the strength of your planned exit strategy plays a significant role in the likelihood of your bridging loan application being accepted. The more robust and well-documented your exit strategy is, the higher your chances of approval.

What are the costs of a bridging loan?

Bridging loans provide convenient and fast finance, however, they aren't known to be the cheapest form of finance.

Bridging loan fees

Some lenders charge a fee to provide a bridging loan, and this can get expensive. A fee on a bridging loan can range from 0.5%-1.5%. For this reason, bridging loans should only be considered for short-term borrowing.

Monthly repayments on bridging loans

Bridging loans do not traditionally have monthly repayments and interest is paid back when the loan is repaid once the expected funds have been raised. This is known as Retained Interest.

Deposit required

Most lenders require a deposit of 25% of a property value to agree to a bridging loan. Of course, this means you can only borrow up to 75% LTV against your property.

If the property you are purchasing costs £250,000, you will need a deposit of £62,500 to use to get the ball rolling.

Arranging a Bridging Loan

A bridging loan is a specialty lending product. Currently, very few banks offer bridging loans to their customers.

Specialty lenders will look at each bridging loan application individually. Since each applicant has a unique set of circumstances, bridging loans can be complicated.

Speaking to a bridging loan Adviser will allow you to benefit from the administrative support on offer as well as the range of lenders. Your adviser will be able to review the panel to see who can offer the most competitive, most suitable bridging loans for you.

In summary, what can a bridging loan be used for? It can be used for a wide variety of financial transactions to bridge the gap. However, you need to have a clear exit strategy and solid evidence to prove it can't fall through. At that point, consider seeking advice to proceed.