bridging loans explained - part 1 of 3
As short-term financing options, bridging loans can repair or stabilise broken property chains. This can make it possible for you to purchase a new home before your current home sells. It can also allow you to buy land or develop a commercial property while you wait for another type of funding. Bridging loans help many people finance property sales transactions that might otherwise be impossible for them to complete.
1) What Are Bridging Loans?
Bridging loans are secured financial loans that fill (or “bridge”) the gap that occurs when you want to purchase a property before other funding is available. Since these loans are asset-based, you must own property, land or another asset of high value for loan approval. Many people use a bridging loan to buy a new home or commercial property after offering another property for sale. By examining all of their varied functions and benefits, you can gain a full understanding of, “What are bridging loans?”
Both landlords and property developers use bridging loans frequently for funding property building and rental projects. However, this type of funding is growing increasingly popular among homeowners today since the timing of property chains is often difficult to predict. Some commercial bridging finance can be exempt from regulation. Yet personal bridging loans are all under regulation by the Financial Conduct Authority (FCA). These loans are most often ruled as mortgages, loans or consumer credit. Fewer owners of residential or business property today need to ask, “What are bridging loans?”
There are two different types of bridging loans, closed and open. If you apply and are approved for a closed bridge loan, you will have a fixed date for repayment. You will probably get a closed loan if you have exchanged contracts and are waiting for your home to sell. In an exchange of contracts sale, your attorney and the buyer’s attorney swap signed legal contracts. The property buyer pays a deposit to make the agreement binding.
When using an open bridge loan, no definite repayment date is set. However, you are usually required to repay your loan within one year. Whether you have an open or closed bridging loan, the lender will ask for a clear, sensible repayment plan. Your plan for repaying the loan may be getting a mortgage or repaying with equity received from a property sale. Most lenders also want firm evidence that you are purchasing a new home or other property and its price. They may also be interested in your back-up strategy for the loan repayment if the first plan should fail.
2) What Can I Use Bridging Finance For?
Bridge financing can be used as loans for various reasons related to residential or commercial property. The most common reasons for applying for this type of loan include buying land for building and purchasing a new home. Other major reasons are filling the gap in a broken property chain or buying a commercial building.
Many people today know that bridging finance is available. Yet they still ask lenders and members of the real estate industry, “What can I use bridging finance for?” Simply stated, you can seek approval for a bridging loan for a number of different reasons, such as the following:
- Buying a new house before your home sells;
- Starting a property development project;
- Building an office building or factory;
- Buying property as a rental investment;
- Finalising divorce settlements that involve property;
- Selling property to pay a tax debt.
Some homeowners and small business owners think that bridge financing can be used only by landlords, investors or property developers. Yet today, these short-term loans are also frequently used by individuals and businesses. More people now understand how this convenient type of funding can bridge time gaps in funding for real estate transactions.
If you are a UK resident who is 21 years of age or older, you can apply for a bridging loan. Your general personal financial status is not normally a factor in deciding your eligibility for funding. A bad credit report and CCJs do not usually prevent you from receiving bridge financing acceptance. This is due to the fact that these loans are asset-based. When you receive approval for this type of funding, it is based on the value of the property involved in your transaction.
3) Are Bridging Loans a Good Idea?
Bridging loans can be of great benefit to anyone who needs short-term funding during the process of buying or developing property. These loans can save many home or commercial property sales from failure do to the temporary lack of funding. They are especially helpful to homeowners who are buying a new home before the closing date for their current properties. This form of property financing has a fast, simplified application process. Property buyers can get bridge loans based only on the value of their current homes or commercial buildings.
Buyers may have plans to construct a new apartment building or commercial property for rent or sale. If so, they can often gain approval for this funding based on the estimated value of the new property when completed. They may qualify to borrow large sums of money with flexible borrowing and repayment terms. Obtaining approval for a bridging loan can enable property buyers, builders and developers to move forward with their plans. They can take advantage of real estate opportunities that otherwise would not be available to them. Most buyers today would answer “Yes” with enthusiasm when asked, “Are bridging loans a good idea?”
Many people favor the use of bridging loans since they already have an exit strategy in progress. For example, most homeowners who are selling their current homes and buying new ones have already applied for a mortgage or long-term funding. They need the bridge loan for interim, or short-term, funding until the long-term financing is approved and issued. These home buyers are confident that they can repay the bridge loan with the mortgage or longer-term loan. They know that their current properties or their real estate building projects are high enough in value to ensure approval of this short-term funding.
Especially since some banks and building groups or societies have tightened their rules for funding acceptance, bridge financing is needed. Many financial institutions are also requiring more time to approve mortgage applications as well. For this reason, larger numbers of home property buyers are turning to bridging loans to sustain their new home purchasing deals until their mortgages are approved. Today, the number of bridging lenders available to residential property buyers is also greater than ever before. This fact encourages many previously tentative buyers to enter into firm property buying agreements.
Bridging loans explained - part 2
Don’t forget to read the other sections, for more information an help on understanding bridging loans and how they work.
If you need to understand how bridging loans work, or want help in securing a bridge finance loan, then get in touch.