Bridging finance has long been associated with landlords and property investors seeking quick cash injections for housing projects or property purchases. However, the reality is that bridging finance offers tremendous potential and flexibility for everyday homeowners navigating the complexities of the house purchasing process. Despite the myths surrounding this type of financing, when used correctly with the right exit strategy, bridging finance can be a cost-effective and efficient solution.
- Regulated vs. Unregulated Bridging Loans
There are two types of bridging loans available: regulated and unregulated. Unregulated loans are primarily used by property developers and landlords for business purposes. In contrast, regulated bridging loans are authorised by the Financial Conduct Authority and are exclusively used by residential borrowers. Homeowners opt for regulated bridging loans when they want to carry out renovations or refurbishments or break a property chain by purchasing a new home before selling their current one.
- Increased Demand for Regulated Bridging Loans
In recent years, the demand for regulated bridging loans has surged due to financial pressures stemming from the Covid pandemic and the subsequent cost-of-living crisis. Borrowers are actively seeking more efficient and cost-effective capital raising options. According to MT Finance’s Quarterly Bridging Trends Survey, regulated bridging loans accounted for nearly half (44%) of all transactions in 2022. This trend is likely to continue as borrowers and brokers recognise the advantages of this type of financing.
- Bridging Finance for Downsizing
Bridging finance is increasingly being utilised by homeowners looking to downsize quickly and on their own terms. This scenario often involves individuals in or approaching retirement who have substantial equity tied up in their current property. By taking out a regulated bridging loan against their property, they can release the cash needed to purchase a smaller property outright. Once their existing home is sold, the funds from the sale are used to repay the bridging loan, serving as the exit strategy.
- Dispelling the Myth of Higher Fees
One common misconception surrounding bridging loans is the notion of higher fees. While the headline interest rate may appear higher than that of a standard residential mortgage, it’s important to consider that bridging loan interest is charged over a much shorter term. Homeowners downsizing typically require bridging finance for a short period, usually between two and six months, depending on how quickly they sell their current property. This significantly reduces the overall interest payable.
- Competitive Rates and Swift Access to Finance
Homeowners looking to downsize often have a loan-to-value (LTV) ratio of 50% or less, granting them access to the most competitive rates on the market. Additionally, automated valuations (AVMs) streamline the process, leading to further cost savings. Bridging loans can be arranged swiftly, typically within three to five weeks, making them ideal for borrowers willing to pay for the convenience of quick access to finance.
Bridging finance offers homeowners greater flexibility and efficiency when it comes to moving house, especially for downsizing purposes. By utilising regulated bridging loans and developing a sound exit strategy, homeowners can access the cash locked in their existing property, purchase a new home, and repay the bridging loan upon selling their current home. It’s essential to seek advice from mortgage brokers experienced in bridging finance to ensure the most suitable solution for individual needs. By dispelling myths and understanding the intricacies of this financing option, homeowners can unlock the opportunities and benefits of bridging finance in the mortgage market.