There are various options for fast, short-term funding available – but in the property world, a bridging loan is an increasingly popular option. Designed specifically to bridge the gap in funding, they can help with everything from buying a property on a tight deadline, to small or large-scale developments.
To get you up to speed with bridging loans, here’s our simple overview – with some ideas on how property professionals take advantage of them to get ahead with their projects.
What exactly are bridging loans?
They create a bridge between a specific funding gap and are traditionally used in the classic ‘chain break’ scenario. This is where your buyer pulls out, but you need to sell to fund your next property purchase. Without the funds from the sale, you risk missing out on the next purchase, so need an alternative source of finance. Bridging is the solution, and lenders will insist you have a clear ‘exit’ in place. This is usually the eventual sale of your existing property or refinancing to a longer-term loan.
Although bridging loans are often a perfect fit for broken property chains, you can use them in many other situations, too. They often provide a useful option for entrepreneurs and developers who are faced with a gap in their cash flow. They can be particularly helpful because:
- Loan size is flexible: Bridging finance is secured (where the property provides security for that loan). Minimum loan size could be a relatively small sum – many lenders start from £50,000 – which is ideal if you are a small-to-medium sized developer and many High Street lenders are only looking to place £1m+ loans. Maximum loan sizes can be £50m+, which shows the versatility of the product.
- Fewer lending requirements to meet: Most High Street lenders are only able to lend on properties in a habitable state – i.e. with a kitchen and a bathroom. This can be a problem for property professionals who want to get a ‘bargain’ – often by purchasing properties below market value as they need major renovation. Bridging lenders are perfect in these scenarios, as they don’t have that requirement – they’ll often consider lending on the current property value regardless of its state.
- Quick decisions and fast access to funds: As with all finance agreements, credit checks and property value assessments are necessary – but arranging bridging loan finance isn’t quite as intense. This means things can move quickly – and we typically process a case from initial enquiry through to completion in two weeks – but have often arranged funding in as little as three days.
- No early repayment penalties: Typically, in the world of borrowing, there tends to be early repayment penalties if you make overpayments on your mortgage or loan. This isn’t the case for bridging loans, as alternative lenders understand that property projects naturally need more flexibility. Most loans are for a year-to-eighteen months – but if you find you finish work early, there’s no need to worry about penalties for early repayments (although most lenders require the first month’s payment to be made).
How property professionals can take advantage of bridging loans
Short-term bridging finance can be highly beneficial for property professionals. Here’s a look at exactly how they can help:
Property purchases at auctions
When you win a bid on a property at an auction, you’ll often be required to pay the deposit immediately, and the balance within 28 days. With High Street lenders, a 28-day timescale to arrange a mortgage is extremely tight, and very unlikely to complete in time. This is where bridging finance can really come into play.
Additionally, some property investors specifically choose to purchase un-mortgageable properties as they naturally come with a lower purchase price. As mentioned earlier, bridging loans can be particularly useful in these scenarios – enabling funds to complete in time, and so you can get them in the state required to secure longer-term finance.
When time is of the essence, bridging can be an extremely powerful tool to help you snap an opportunity before others.
Purchasing properties without planning permission
Before you get development finance in place for bigger development projects, lenders often want to see that you already have planning permission. You may know that you’ll likely get it, but until it’s confirmed, you’ll need to find a way to bridge the financing gap. Once you get the permission, you can then switch over to development finance, which is an increasingly popular option – and is finance Enterprise can also help source.
Boosting Current Working Capital
Finally, you may find yourself needing a little extra funding for your renovation or new build project. Businesses can often find themselves struggling with cash flow in these situations, with additional equipment needed at the last minute or an extra pair of hands to help finish the project. Bridging loans are ideal for this use, too.
Enterprise Finance offers Bridging and Development finance through brokers and intermediaries. Got a case we can help with? Find out more about what we can do and contact us for a quote.