What is bridging finance?
Bridging finance is a special type of short-term loan. A lender will let you borrow money, using an existing property in your possession as collateral for the loan. Most often, it’s used by people who need to access money to buy a new house before their old home sells.
Don’t misunderstand what ‘short-term’ means when it comes to bridging. You might need to borrow for a few weeks or a couple of years. You could use bridging finance in both these settings. What it’s not used for is very long-term lending in the same way you would a mortgage for 20+ years, for example. Bridging loans are more expensive than other types of loan (usually because there is more risk for the lender), and if you need to borrow for a long time, you’ll find that it’s an option that gets pricey pretty quickly.
Bridging finance is a great way to release equity on a property and have money available to you to move forward with your plans.
How can I use bridging finance?
Bridging finance used to be a way to buy a new property before your old home had sold. It was also valuable for people who knew that their house sale would take a long time, but they needed money to buy a new home quickly. Today, it can be used in lots of different ways, and it’s not limited to ‘bridging the gap’ between the sale of one property and the purchase of another.
For example, bridging finance can be an option if you’re waiting for a windfall or money for some reason (i.e., inheritance, divorce settlement) and you want to buy a house before the money comes in. Bridging loans can also be amazing options for other reasons. Sometimes you might not need an extended loan, and you don’t want the hassle of getting a mortgage. Bridging loans can also be used to buy auction property. They are also commonly used if you find a ‘bargain’ property you want to buy at a fantastic price (perhaps to renovate or later rent out), but don’t have the money available to you to buy in cash. Bridging finance can be used in all these settings – and more.
Exiting bridging loans
As always, you need to think about risk when it comes to bridging finance. If you can’t keep up with repayments, you risk losing the property you have secured the loan against.
You’ll also want to think carefully about how you pay back the loan for the same reason. If you’re going to sell your property to pay back the loan, are you sure you can sell it at a price that will cover the bridging loan? Are you sure you can sell the property in time to pay back the loan in the timeframe you’ve agreed with the lender?
Sometimes, even if you use a property as collateral for a bridging loan, you might not plan to sell that home to pay back what you’ve borrowed. Many people do this if they know they will receive a sum of money that they can use to pay off the loan: a divorce settlement, the sale of a business or another big payout, for example. Even when this is the case, you also need to think carefully. If the money comes late or if you don’t receive as much as you expected, you can run into trouble.
Lenders will want to understand your plans for exiting the loan and they will want you to have a defined strategy for doing so. Exiting a bridging loan is basically the process of bringing your bridging loan to a close and paying back what you’ve borrowed. Closed bridging loans are when there is a set repayment date that you will need to meet. Lenders will usually opt for this type of exit if you plan to sell your property to pay back the loan, and you’re just waiting for the property sale to go through to be able to do this. If you know you have a significant sum of money coming in by a specific date, this will (usually) also be a closed bridging loan.
Open bridging loans don’t have fixed repayment dates – they are effectively more open-ended. Don’t assume this means lenders will let things slide: your bridging loan will still have a fixed end date when you need to repay the loan. An open bridging loan simply refers to the fact that the loan doesn’t have to be paid back on a specific date and that there is more flexibility in the repayment schedule.
Many people think the only way to pay back a bridging loan is to sell the property you’ve used as collateral. This isn’t necessarily the case. You might choose to refinance the loan (i.e., take up a traditional mortgage and use the initial loan capital of the mortgage to pay back your bridging lender). Alternatively, you can also use other funds to pay back the original loan amount. Thinking carefully about how you’ll pay back the loan is vital, and having an exit plan before you take the loan is always sensible.
How to go about getting bridging finance
There are many bridging finance providers, which is great because you’ll have lots of choices when getting a loan.
However, we always suggest going ahead carefully. If you have a solid financial background and your lender is confident about your security (i.e., the property you’ll use as collateral), many lenders will be quick to let you borrow. With bridging finance, it’s easy to get caught up in opportunities, ideas, and plans but forget to look at the bigger picture. Done properly, bridging finance is a brilliant way to secure a short-term loan, often for a significant amount of money. But rushed or not thought out, and you’ll find you might pay more than you need to, exit can be stressful or that you’re not getting as much flexibility from the deal as you need.
With any bridging loan, you’ll want to make sure:
• You’re being offered a reasonable price in terms of interest rates
• You understand what you’ll pay, when, and what will be left to pay back on exit (this isn’t always as clear
as you’d imagine)
• You have a very solid exit plan (i.e., you know you can pay back the loan and by when)
• Your bridging finance lender is reputable and trustworthy, and you feel good working with them
• That bridging finance is the right option for you
Why work with London FS for bridging finance?
Working with a specialist independent broker like London FS can be especially beneficial with any kind of bridging finance.
To start with, while there are lots of lenders to choose from and while you can approach them independently, you won’t always get the best deals from them.
The London FS team have experience with all types of bridging loan, and we are specialists in large loans if you want to borrow a significant amount. We can help you understand more about this specialist type of finance and make sure it’s a good choice for you. We can also talk you through bridging finance so you know how it works and you can understand interest, repayments, exits and your options. All of this is really important in getting the best bridging loans that match your needs.
As well as understanding the bridging finance landscape, we will also help you find a lender. Lots of bridging finance lenders are unwilling to negotiate with individuals – they will offer you a package on a ‘take it or leave it’ basis. We will approach lenders you might not have access to and negotiate bridging finance deals for you. You’ll get more attractive rates and a bridging finance deal that’s a great fit.
If you’d like to talk to us about bridging finance and its uses, please let us know. We are always happy to give you insights and information about what kinds of offer and financing we will secure for you. Give us a ring on +44 (0)208 427 5057 or drop us an email: enquiries@london-fs.com.
IMPORTANT INFORMATION
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
The Financial Conduct Authority does not regulate some forms of buy to let, secured loans, commercial finance, bridging finance, overseas or offshore mortgages and will writing.
Nothing contained within this communication should be construed as advice. Please seek individual professional advice relating to your personal circumstances.
