What is a Bridging Loan?
A bridging loan is simply a short term loan secured on property or assets. It can be used by individuals and businesses for any purpose until permanent funding – or their next stage of financing – becomes available or they sell a property.
The interest rate on bridging finance is generally higher than rates on other loans, reflecting the risk profile, which ensures a bridging loan is considered when a short term finance solution, usually of 12 months or less, is required.
It is also an obvious choice for someone in a property chain which has collapsed or is taking much longer than expected to complete. As the name implies the bridging loan fills the gap between the purchase date and sale date to ensure the buyer does not risk losing the property they want – the bridging loan is repaid when the property is finally sold.
There are two types of bridging loan:
Closed Bridge – When the borrower has a set date by which the loan will be repaid.
Open Bridge – When the borrower sets out a proposed exit plan to repay their loan, with no definitive date agreed at the outset. There will however be a maximum time span beyond which the loan cannot extend.
Uses of Bridging Loans
Bridging loans will typically be used by homeowners and property owners who want to:
- repair a broken property chain so as not to miss out on the purchase
- build their own house
- buy the new property before selling their existing one
- convert a barn or similar building into a residence
- purchase property at auction
- secure temporary cash flow cover during a property transaction
- unmortgageable properties
- fix or restore properties where traditional mortgages would not be approved
- renovate or develop a property or piece of land into one house or multiple houses
And for businesses that want to:
- take advantage of market conditions or discounted investment opportunities and need quick access to funds
- raise capital against land and property
- satisfy tax liabilities when the amount needed cannot be accessed within the required timeframe
- meet financial obligations and payments or overcome financial difficulties
How it works
Regardless of whether you want open or closed bridging, typically funding providers will follow a process similar to this when property is involved, with eight steps to securing bridging funding.
The eight steps will typically take between one and four weeks, from completed application to funds available. In rare cases the process might be shorter in the right circumstances or longer if the deal is particularly complex, perhaps involving development property.