Bridging Loans For House Purchase
Here are some examples of when you may find bridging loans helpful, alongside some of the benefits of using bridging finance in a house purchase.
Bridging loans – why are they used, and what are the benefits?
- Fast financing to purchase a property - is possible with a bridging loan, which acts as a short-term cash loan (usually between 3-24 months). The main advantage of “bridging the gap” is making you a cash buyer, a more attractive option for a seller, and expediting the entire process.
- Time to find the right buyer – your current property needs time on the market to find a suitable buyer. Additionally, capital raised from a bridging loan frees up options to improve the value of your home; through home improvement and renovation.
- Applicable for residential and commercial properties - bridging loans are flexible for different types of property; residential, commercial, building plots, land without planning permission and any other unmortgageable property that would be impossible to finance through traditional means.
- Lenders are willing - if security is offered in the form of a property you already own or other assets, lenders are likely to consider borrowers that may not have a perfect credit history. However, a clear exit strategy must be in place for repayment.
- No early repayment fees - traditional mortgages are expected to be paid long-term, and fees will incur for early repayments. Banks will lose money on their investment based on their calculations that span a longer-term. Often, a bridging loan allows you to only pay interest for the duration it is outstanding. Therefore, incurring no similar repayment fees compared to traditional finance.
When is a bridging loan the right option?
When it comes to purchasing a house, bridging finance can be useful in several scenarios.
- Purchasing your dream property - having cash readily available in a competitive property market will allow you to buy before it slips out of reach. You could be downsizing or upsizing, relocating abroad or simply moving to a more suited neighbourhood. Whatever the case, bridging finance offers the speed to act in a competitive market.
- Buying before selling – a bridging loan will ease the transitional period between purchasing a new property before the old one is sold. When the loan comes to the end of the term, it can then be repaid from the proceeds of the property sold – “bridging the gap”
- Buying a property at auction - securing a traditional mortgage for a property bought at auction can be impossible due to the short time frame of 28 days to complete payment. A bridging loan offers a fast solution, enabling you to raise funds to complete the auction purchase within the 28-day deadline.
- Investment property - Bridging loans allow landlords and property investors to raise fast cash when an opportunity arises, e.g. a house to flip on, or to purchase a rental property which will later be refinanced through a buy to let mortgage
You must have an exit strategy
Bridging loans may offer quick solutions, but you must have an achievable repayment plan before the outset. Consequently, bridging finance requires a solid exit strategy to repay the loan on a short-term basis. Typically, the repayment funds will be acquired through the sale of a property.
If you are securing a bridging loan to invest or purchase unmortgageable properties requiring renovation or development, you must carefully consider the project's scope.
Borrowers will need to reassure lenders when securing low-interest-rate loans. Therefore, it is essential that a short-term project involving a house purchase is manageable and that delays do not hinder repayment.
