A bridging loan is a form of short term finance, normally arranged for 1–12 months, typically secured against property or land assets.
Here are couple of typical scenarios for when a bridging loan should be considered and what the alternatives might be.
The Property Developer
Property developers often look high and low for properties that can be snapped up at bargain prices. More often than not this means that the properties they buy are in poor condition, often uninhabitable – in current market conditions this means that the property would not normally be suitable for a mortgage. Where a property is not suitable for a mortgage, it may be suitable for a bridging loan. Bridging loans can be secured on a property that has no bathroom or kitchen, the property could be gutted and in need of a complete refurbishment.
The property developer goes to auction and successfully bids for a property which is in a poor state of repair, on that day the developer puts down a 10% security deposit and normally have 28 days to complete the purchase. As 28 days is considered a short period of time in which to complete a mortgage, and in addition the property is in poor condition the developer decides a bridging loan will be the best option.
A bridging loan is arranged for 70% of the property value via his broker at a rate of 1.25% per month. The lenders offer gives the option of interest being paid monthly or being deducted from the loan advance, the developer chooses to have 6 months interest deducted from the advance as his plan is to refurbish the property in 2 months and sell the property within 4 months. The bridging loan completes within 2 weeks.
The developer also considered a Refurbishment loan which offered 65% of purchase and 100% of refurbishment costs, the developer had the funds for the refurbishment so decided a bridging loan was the best option.
The Family Home move
In a normal house move the family home will be sold simultaneously to the purchase of the new property with the equity from the existing property being transferred via the solicitor to the new property. If the buyers of the existing family home being sold withdraw their offer this will always be a major inconvenience for the family. In this case the equity from the existing home cannot simply be transferred, there will be two options – 1) wait to find another buyer 2) release the equity via finance.
In this case the family do not want to loose the new property, so they decide to proceed with the purchase. They have an existing mortgage for 50% of the value of their property which they port (move) to the new property. They need 55% of the equity from the existing property, so they arrange a bridging loan for 55% of the existing property value at a rate of 0.95% per month for 6 months and aim to sell their existing property within this 6 month period.
The family also considered the option of keeping their existing property and arranging a Buy To Let mortgage instead of a bridging loan, they opted for the bridging loan due to the fast completion offered and decided to continue with the sale of their property.
It is essential that when a bridging loan is taken a means of repaying the loan is arranged, this is typically via the sale of the property (the security) or through refinancing.
A bridging loan is short a short term loan that can often be used in place of a mortgage, where finance is needed in a short time frame or when a property is in poor condition and cannot be mortgaged. Bridging loans can be secured against most types of property including residential, commercial, mixed use and land. Typical interest rates are 0.95% – 1.50% per month for first charge residential bridging loans and 1.25% – 1.75% per month for first charge commercial and land bridging loans.