If you are a homeowner looking to purchase your dream home, but waiting for the sale of your existing home, or you are a business owner looking to expand your business, but your payments are stuck, or you are a real estate investor looking to seize profitable property development finance London opportunities, bridging finance can be a valuable source for individuals, businesses and property investors who need quick access to funds.
What is Bridging Finance?
Bridging finance is a temporary form of finance that is intended to cover short-term funding issues. In other words, it is used to bridge short-term funding gaps, until long-term finance is available. Any individual or institution that urgently requires capital to fulfil its short-term obligations can obtain bridging finance. Bridging loans usually have higher interest rates than traditional mortgage loans, and are backed by some kind of collateral, such as residential or commercial property.
How Bridging Finance Works?
Bridging loans can be used for many purposes, but how much you can borrow depends on your credit profile, the value of collateral and how you plan to repay the loan.
#1 The initial step of the process is to apply for the bridging loan. Submit a bridging finance application by providing the details of your financial circumstances and the value of your collateral.
#2 The lender will then assess the value of your property, your eligibility and the feasibility of the repayment plan.
#3 Based on the value of the property and the borrower’s circumstances, the lender will approve the loan. The lender will also provide a detailed loan offer, including the loan amount, interest rate, repayment terms and associated fees.
#4 The loan agreement will be signed by both parties and the transaction will be initiated. This entire process takes about 7 days to complete.
Types of Bridging Finance
Different individuals and organisations have different needs for financing and situations. Hence, any one type would not be suitable for all purposes.
#1 Open Bridging Loans
A bridging loan is said to be open when there is no fixed repayment date. This is often used by individuals who are uncertain about the exact repayment date. For instance, an individual is planning to repay the loan from the sale of the existing property, but is not sure when the property will be sold. Due to flexibility in repayment, interest rates may tend to be higher in open bridging loans.
#2 Closed Bridging Loans
Closed bridging loans have a fixed repayment date, which is already determined at the beginning of the loan term. This is generally used by borrowers who are certain that the property sale will be completed before a specific date. Closed bridging loans have lower interest rates compared to open bridging loans due to lower risk as the repayment date is pre-determined.
#3 First Charge Bridging Loans
When you secure a bridging loan, the lender places a charge against the asset, such as property. It enables them to seize the property if you default on your payment. The bridging loan is said to be the first charge if the property used as security has no existing loans or has enough equity available. In that case, the lender has the first priority to possess and sell your property in case of defaults.
#4 Second Charge Bridging Loans
If the property used as security while taking out a bridging loan already has an existing loan, such as a mortgage, it can be classified as a second charge bridging loan. In that case, the bridging loan lender will be second to being repaid when the borrower defaults on their payment. The second charge bridging finance poses a higher risk to the lenders.
Bridging Finance Examples
To better understand the concept of bridging finance in London, let us give a few examples of in what scenarios bridging finance can be used.
Example #1
Suppose an individual wants to purchase a new home to accommodate their growing family members, but don’t have enough funds on hand. He is dependent on the sale of his current home to pay for the new home. In this case, he can access bridging finance to purchase a new home, and then repay the loan when the existing home is sold. He can use your existing home as collateral and the lender will grant the loan based on the value of the property used as collateral.
Example #2
Suppose a company is planning to purchase new equipment as a part of its business expansion. However, they don’t have enough capital to invest right now, and therefore, they applied for a commercial loan. The company is waiting for the commercial loan to be approved, but they need to continue operations during this waiting period. In this situation, the organisation can apply for bridging finance to cover operating costs and payroll until the commercial loan is approved.
Example #3
An individual is looking to purchase a property through auction. He won the auction bidding and he is supposed to pay 10% of the total amount and the remaining amount within 4 weeks. He managed to pay 10%, but doesn’t have enough funds to pay the remaining amount. With bridging finance, the individual can raise the required amount to complete an auction property purchase, and then refinance it to a long-term mortgage.
Example #4
A property developer finds a lucrative investment opportunity, but needs to act quickly in order to seal the deal before anyone else. However, his funds are tied up in other investments, so he is looking for short-term financing. The real estate investor can access bridging finance against his existing portfolio and new investment property to complete the property purchase.
Example #5
A homeowner wants to renovate his home in order to increase its selling price. He is also looking to purchase the new home simultaneously. Bridging loans can be used to fund the renovation project as well as purchase the new home concurrently. The repayment of bridging finance can be done once the renovated property is sold.
Final Thoughts
A bridging loan is a short-term financing, which is usually accessed until permanent or long-term financing is available. It provides a quick and flexible way to bridge short-term financial gaps. By understanding what is bridging finance, its types and practical examples, borrowers can make wise decisions about how bridging finance can be used to meet their short-term financial obligations.
