For anyone looking for temporary short-term lending, perhaps bridging finance could be for you. Bridging finance is a great solution for people who need a quick, temporary cash injection but don’t want to have to take out a conventional long-term mortgage. In this blog we will go through what bridging finance is and how it can help you get the most out of your money.
What Is Bridging Finance?
Bridging finance does pretty much exactly what it says on the tin, it is a loan that bridges a gap in property finance. It is a short-term loan that is there to help people finance a house purchase where a straight sale and purchase is not immediately possible. Bridging finance can be used in many different scenarios, but here are a few of the most common:
- You might buy a property that is in serious need of renovation. Because of the state of the property, a traditional mortgage might not be possible but bridging finance will allow you to purchase the property and make the relevant improvements to the property. Then you can get a traditional mortgage. This can be great if you need to wait for things like planning permission.
- You are purchasing a property in a chain. Through no fault of your own, the chain has fallen through and rather than lose the property, you might want to take-out short-term bridging finance until a new chain can be established.
- A large-scale property developer (i.e. constructing several houses or flats) may outsource a lot of labour and materials from different sources, a short-term bridge can help consolidate all the money needed into one place, making it much more manageable.
- You buy a property or properties through an auction or foreclosure sale or something similar, and you need funds quickly to ensure you get the property. A traditional mortgage might take too long to secure, and you could lose the property.
How Does It Work?
Bridging finance is similar to a normal mortgage however there are a few differences. A mortgage lender will loan you money and will charge you interest at a fixed rate, like a standard mortgage. Unlike a normal mortgage (which can be taken out over a maximum of 40 years), bridging lenders will want a bridging loan to be paid back within 12-18 months on average. However, the borrower can pay off the loan at any time within the 12-18 months if they like.
You can normally take a bridge out on one of two scenarios, a closed bridge and an open bridge. Here are the definitions:
- Closed bridge: Everything with the bridge is confirmed by a set timeframe. So, this could be a scenario where someone purchases a property at auction and needs to pay the balance of the purchase within a month.
- Open bridge: A plan is in place of how the loan will be paid back but an exact date has not been confirmed. This could be someone building a property who intends to sell the property within 12 months but has not got an exact completion date yet.
What Are The Pros To A Bridge?
- Fast cash – Bridging loans are often MUCH quicker to secure than a standard mortgage. Right now, there is a huge backlog in standard mortgage application assessments with some lenders saying that they need 35 working days to assess one application. A bridging loan is designed to be quick to offer, although they are never guaranteed, and a specific timeline isn’t written in stone.
- The interest incurred on the loan can be rolled back and paid in one lump sum rather than monthly. The idea of a short-term quick loan is that you are able to access money quickly…not spend it! Rolling back interest allows you to have the loan without having to fork out interest payments every month. At the end of the bridge when you repay the loan (through a new mortgage or sale of assets or otherwise), you would pay back the interest you owe too in one lump sum.
- Usually come with no exit fees – Most traditional mortgages will have exit fees meaning that if you pay back the loan before a certain date, the lender will charge you a fee due to the loss of business. As bridges are designed for the short term, you are not normally penalised for paying back early.
What Are The Cons To A Bridge?
- High interest rate – As these are specialist loans, they often come with high interest rates. Interest rates in general are high across the market at the moment and because not all lenders offer bridges, the products are more scare and therefore demand higher rates. As we have mentioned above, you can choose to roll back the interest and pay it in a lump sum rather than monthly, but this might not be the best option for your own circumstance.
- Bridges will need some sort of security against the loan – Because it is short term lending and can sometimes be a very large amount of money, chances are that the lender will require some sort of security against the loan to ensure that it gets paid back. This is often property. If you use property as security and don’t pay back the loan (plans don’t work out, you aren’t able to finish the development, you aren’t able to re-establish a house sale) then you could risk having your security seized by the lender and losing your assets.
- Fees – Not really bridging lending specific, but definitely something that you need to consider when getting a bridge. The idea of bridging is quick cash and most people who use a bridge don’t have immediate access to money. With a bridging loan (and most other mortgages), you will need to pay certain fees. These are arrangement fees to arrange the loan, broker fees to apply for the loan, valuation fees, and legal fees. If you don’t have money to cover these fees when applying for a bridge, then you won’t be able to get one.
Is A Bridging Loan Right For Me?
Give us a call. That’s the only way to find out. If you are a professional property developer or are wanting to purchase a property but need a little cash injection in the short term, then a bridge might be the way forward. Give Oportfolio Mortgages a call today to chat through the scenario with one of our advisors. We have a lot of experience with securing specialist mortgages like bridges, and we are more than happy to help.
