Bridging finance advice
Bridging finance is the short-term financial solution you need to complete a residential property purchase or commercial investment. This is a short-term loan that typically lasts between 1 and 18 months. It is meant to cover the time difference between two property-related transactions, or in order to finance a property that is currently unsuitable for a typical mortgage (refurbishment required). As the name implies, it is meant to bridge the gap.
Bridging finance is needed when you need to buy a property before finalizing the sale process of another property. Commonly used in property investment and development, but still common place in some residential transactions, bridging finance is used to secure a property, generate cash flow or to be used to fund light works as long-term financing is being put in place.
Bridging finance is usually always repaid when a property in the transaction is refinanced or sold.
Open and closed finance
Bridging finance can be open or closed finance.
Closed bridging loan – this is a type of bridging loan with a clearly outlined exit plan. This is the most preferred type of bridging finance by borrowers and lenders because the exit plan is certain.
Open bridging loan – this type of bridging finance has no definite exit timing or source of repayment.
Different lenders offer bridging finance. Traditionally, this was a preserve of banks but this has changed after the financial crisis. Specialist property lenders can offer bridging finance products too, and we here at DNA Financial Solutions have access to the whole of that market, allowing us to find products most suitable to circumstances.
How much can you borrow?
How much you can borrow for bridging finance depends mostly on the value of the property borrowed against. Lenders calculate the rate based on the property’s purchase price, as it is common with mortgage borrowing. However, a few lenders can issue loans based on current market rates and the value of the property.
Some lenders will even allow you to borrow based on the expected value of the property after completion of the project. This is referred to as the gross development value.
How do you qualify?
The determining factor of whether you qualify for bridging finance is the value of the property you want to buy. Unlike mortgage loans, bridging finance lenders are not usually so interested in the borrower’s financial situation or income and are more interested in the projects figures as a whole. This flexibility and simplicity are what make bridging finance valuable and powerful.
Bridging can be used for many a purpose, to name a few:
With most auctions you will need to complete the purchase within a 28 day turnaround, bridging will enable you to secure the property whilst you look into other longer term options. We can discuss these options with you.
If you’re looking to develop a property then a bridge could be the right option for you. With different varieties of bridging available, you can purchase the security and improve it dramatically whilst only ever using the equity within the property itself, meaning you could make a profit to fund your next project.
A property can be purchased using a bridge when conventional lenders would deem the property ‘un-mortgagable’ – allowing you to refurbish the property to a standard that lenders deem acceptable, to either sell for a profit, let the property for a long term investment or consider the option of moving into the property and residing there, this is something we can discuss with you and let you know of the best options available.
Distressed bridging is by no means the most common form of bridging however can be just as required if not more so that the other variants available. Distressed bridging is used when, for one reason or another, an applicant’s personal circumstances have changed and they are now in a position where they may be repossessed.
A bridge can allow for the applicant to sell on their own terms so that they don’t lose out completely on the financial aspect of the sale.
This is simply what it says. You are looking to move to a smaller property, and retain some of the equity into your savings but you not have a buyer for you property yet, and have had an offer accepted on your new property. Bridging finance can help you secure your new purchase quickly – typically within 2/3 weeks and help buy you the time to sell your current residence in which you will yours the proceeds of the sale to repay the bridge. If you feel we can help, please get in touch.
The Financial Conduct Authority does not regulate some forms of Buy to Let, Tax Planning, Wills, Bridging Finance, Secured Loans, Trusts, Commercial & Overseas Mortgages or Conveyancing.