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".
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:
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.
Some auctions require a quick turnaround, typically within 28 days. A bridging loan can be the fastest solution to complete the purchase.
You can use a bridging loan to fund renovations and increase the value of your property before seeking long-term financing.
This allows you to move into your new home once all the work is finished.
Bridging loans provide a temporary solution to bridge the financial gap in unexpected situations (like medical bills or house repairs) and receiving permanent financing for those expenses. allowing you to meet your immediate needs while waiting for long-term funding or completing necessary transactions.
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.
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.
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.
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.
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:
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.
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.
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.
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.
Seek guidance from financial advisers or mortgage specialists who can assess your specific circumstances and provide personalized 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.
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.
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.
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.
Bridging loans provide convenient and fast finance, however, they aren't known to be the cheapest form of finance.
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.
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.
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.
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.
If you are not sure where to start, you can complete the Sunny Avenue Fact Find for bridging loans. The answers you provide help us to find the best-suited adviser. Your adviser then contacts you for a no-obligation conversation to discuss your bridging loan options.
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.
Stuart is an expert in Property, Money, Banking & Finance, having worked in retail and investment banking for 10+ years before founding Sunny Avenue. Stuart has spent his career studying finance. He holds qualifications in financial studies, mortgage advice & practice, banking operations, dealing & financial markets, derivatives, securities & investments.
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