Bridging finance has become an increasingly popular source of short-term funding in the UK.
This relatively new financial product emerged after the crash of the property market, when mortgage lending became very restrictive.
Today, it is used by for everyday households, investors and developers who are looking to buy properties on a deadline, avoid property chains and lengthy mortgage applications.
Bridging loans are designed to ‘bridge the gap’ between the purchase of a property and sale of another.
For many people looking to complete on a property quickly and avoid losing the deal, they can access bridging finance in 2 to 4 weeks (and sometimes sooner) – and repay the loan once they have sold their existing property, refinanced or received funding elsewhere.
This type of borrowing is always secured against an asset, such as a residential or commercial property, and borrowers risk repossession if they cannot fulfil the loan terms which typically run from 3 to 24 months.
With approximately 50 to 70 bridging lenders in the UK, this source of funding falls under a category known as ‘non-bank lending’ or ‘specialist finance’ – with over £7 billion was funded through bridging finance in 2019.
When would you using bridging finance?
Homeowners buying a property
For homeowners who cannot sell their original home and need money from that property to purchase their next property, bridging may offer a solution. You can effectively borrow money against your original house and use this to move into a new one. You simply have to sell your original home before the end of the loan term (up to 24 months) in order to repay your loan in full.
Buying property at an auction
There are potentially huge discounts when buying a property at an auction, provided that you have done your homework and found the right opportunity. When buying at an auction, also known as auction finance, you have up to 28 days to come up with 90% of the property value, or you risk losing your 10% deposit and the property completely. Bridging can provide you with this funding within a short deadline and under terms that are suited to you.
Buy-to-let investment opportunities
Bridging is often used by developers and investors who are looking to take an existing property and rent it out to tenants. This includes multi-purpose units, turning a home into flats and new buildings too.
Although bridging is more associated with purchasing property, it can be utilised for companies looking to take advantage of growth periods. Whether it is investing in staff, marketing or even bailing a company out, bridging is essentially a short-term form of finance that is secured against a valuable asset.
What are the benefits?
One of the key benefits of using bridging finance is the ability to complete on a tight deadline. Particularly for those facing competition when buying a development opportunity or buying from an auction, the application and funding process is significantly faster than a traditional mortgage. Applicants can often receive a decision in principle from a bridging lender in less than 24 hours and can usually complete in 2 to 4 weeks’ subject to financials, affordability and a property valuation.
Many property buyers have felt the stress of being caught in property chains and suffering failures to complete or cancellations due to unforeseen circumstances, especially in light of Brexit, recession and coronavirus. But since bridging finance is not dependent on mortgage approvals, in certain circumstances, you may be able to complete on a property that was otherwise not feasible.
Certainly for those with adverse credit histories that would have often been overlooked by mainstream banks and lenders, bridging lenders are more likely to take a view, given that the application is backed by a valuable security and may increase in value over time.
Bridging finance products can also come with more flexibility and more favourable terms than mortgages since payment terms can be rolled up until the end of the term. Plus, you also have the option to refinance at the end of the loan term if you need more time to carry out development works or you are looking for a potential buyer.
What are the risks?
The main risk of using bridging finance is that your property is at risk of repossession if you do not repay in full at the end of the loan term.
Particularly for properties that are your main residence, if you have not sold your original property and are close to the payment deadline, you could risk losing a huge asset.
If your loan term is fast approaching and you cannot afford to repay, you can refinance under different terms, but these are typically less favourable.
You should also be aware of any extra fees you may incur due to early or late repayment.
In practice, bridging lenders report very few repossessions and only in extreme cases.
Is bridging finance expensive?
Yes, given the short term nature and risk, bridging does technically come out as more expensive than alternative products such as mortgages. With rates in the industry starting from 0.44% per month, this is higher than a mortgage which may be 3% to 5% per year.
It is important to know that bridging is serving a short-term purpose and may be used for investment purposes that may otherwise not have been accessible with a traditional mortgage.