When it comes to buying and selling property, various complications and problems can arise which could make the whole transaction fall through. Or, there are occasions when you think a little bit more money would put you in a far better position, but you don’t have any disposable funds to help until your current property sells.
This is where a bridging loan can come in to pull you out of tricky situations or temporarily boost your financial position.
First, what is a bridging loan and how does it work?
A bridging loan uses the equity available in property as security for the borrowing facility. It is a form of fast and flexible funding which is only intended for short term purposes to bridge a gap in finances until the money becomes available, from the sale of a property, for example, or until an alternative source of permanent, long-term funding can be placed.
According to James Durr, of fast sale cash homebuyers Property Solvers: “bridging loans can be a great way to get access within a relatively short timeframe but, in our industry, where vendors need finance in as little as 7 days, this finance mechanism is often too slow to serve the needs of clients. As more of these loans are underwritten by larger financial institutions, you’ll often find that you may have to jump through as many hoops as if you were applying for a mortgage.”
Fixing a broken property chain
One of the most common uses of a bridging loan is to fix a broken property chain, or to prevent one from breaking.
It happens far too often when, let’s say, the buyer of your property pulls out of the transaction due to personal circumstances. This means that now you won’t have the money to buy the property you were planning to, meaning you will have to let down the seller, which also means they won’t be able to purchase their next property, and the chain begins to fall apart.
This is where a bridging loan can be used.
You can use the loan to continue with your property purchase, and then repay it when your current property sells to a different buyer. Provided there is sufficient equity in the property you are selling (the value of the property minus the mortgage), then you should qualify for a bridging loan. To find out if you would qualify, as well as the estimated costs of a bridging loan, use an online bridging loan calculator.
Purchasing a property at auction
If you are turning to a property auction to purchase your next home, or you are landlord wanting to expand you property portfolio, a bridging loan can be used to do this.
When you have won a property at auction, you have entered into a legal contract to complete the purchase. A 10% deposit (usually 10% of the purchase price), as well as an exchange of contracts, is required on the day of the auction. You are then required to complete the purchase in full within 28 days.
As bridging loans can be very quick to arrange (sometimes as little as 48 hours) and a mortgage could take up to a few months, a bridging loan would allow you to complete the purchase within the given timescale. The bridging loan can be repaid through ‘re-financing’ when you have a suitable mortgage product in place, or again, from the sale of a current property.
You may be in a position to sell your property, but you know that some refurbishments would increase the value and make it sell for a substantial amount more.
Provided there is sufficient equity in the property, a bridging loan can be taken out to fund the refurbishment costs. When the work has been done and the property sells for a higher price, the bridging loan can be repaid from the proceeds.
If your leasehold is nearly at the 80 year threshold and you want to extend it to increase the value, a bridging loan can be accessed quickly to purchase the extension. Once the lease extension is in place, the property can be re-mortgaged or sold in order to repay the bridge.
Alternatively, if you are looking to purchase a property with a short lease, which is making it un-mortgageable, a bridging loan can be used to purchase the property and extend the lease, making it suitable for a standard mortgage.