How Bridging Finance Works in the UK?
Are you planning to buy a new home, but waiting for the sale of your existing property? Or you wish to seize a profitable business opportunity, but your payments are stuck. In such circumstances, raising finance may seem like an impossible task. This urgency not only adds stress but also impacts your property’s worth. Fortunately, bridging finance loans in London can help you raise the required funds for the short term until a permanent funding solution is achieved.
What is a Bridging Finance Loan?
Bridging finance is a form of temporary financing that is used to cover an individual’s or a company’s short-term expenses until long-term financing is secured. It enables the borrowers to meet current financial obligations by providing immediate access to the funds they need.
To access bridging finance, the borrower is required to keep some kind of security, such as property or assets against the value of the loan. Due to the short-term nature of the loan, a bridging loan usually has a higher interest rate compared to other traditional forms of loan.
How Does Bridging Finance Work?
Just like traditional loans, bridging loans are offered at a fixed interest rate, typically higher than traditional loans. The lender may agree to lend the money for a fixed term, ranging from twelve to eighteen months. The borrower must demonstrate a strong exit plan to convince the lender to grant the loan.
When the borrower has a set date for repaying the loan, it is said to be a closed bridging loan. But, if the loan period is not fixed, it is considered an open bridging loan.
Bridging finance is commonly used by homeowners and businesses to bridge the gap when they want to buy something, but are waiting for the funds to become available from the sale of something else. Let’s understand how bridging finance works and how it can be used under what circumstances.
Example #1 – Purchasing a new home
A homeowner is looking to purchase their dream home, but they are waiting for the sale of their current home. With bridging finance, they can access the required funds to complete the sale of their new home. When their previous home is sold, they can use that money to repay the bridging loan.
Example #2 – Investing in new business opportunities
A business is looking to purchase new stock, inventory, or facility that is available at a great count deals. However, a large amount of their money is occupied, causing cash flow problems. In this situation, the business owner may use bridging development finance to fund the necessary purchase, allowing them to move forward with the deal while their due payments are received or permanent financing is being arranged.
Example #3 – Undertaking property development projects
A property developer wants to undertake a development project that requires additional financing to cover the cost of land acquisition and construction. Using bridging finance, the developer can raise necessary funds to commence the development project, and repay the loan when the completed property development finance London is sold or long-term financing is secured.
Example #4 – Completing auction property purchase
Bridging finance can also be useful to complete auction property purchases. When buying a property at auction, the buyer must pay 10% deposit on the same day and the remaining amount within 28 days. With a standard mortgage, the process can take around four to six weeks before the funds are released. In such circumstances, bridging loans provide quick access to the funds, so the buyer can complete the purchase within 28 days.
Example #5 – Renovating and flipping a property for profit
A property owner wants to renovate and flip the property for profit. Whether it is updating the interiors, making structural repairs or adding an extension, bridging finance can provide the required funds quickly to increase the property’s worth and appeal before selling.
Example #6 – Investing in buy-to-let properties
A property investor finds a lucrative real estate investment opportunity but doesn’t have adequate funds on hand. A bridging loan can be used to support investment, so the investor can grab the opportunity without any delay and refinance the property to a long-term mortgage.
Example #7 – Releasing equity
Bridging loans can also be used to release equity from the property for personal and other use. This is particularly useful for property owners who want to raise funds quickly without selling their property.
What You Need to Know Before Acquiring a Bridging Loan?
It is crucial to remember that bridging loans are meant to be used for a short term. You will need to repay the full loan along with the interest charges in a few months, so you must have a strong exit strategy in place, such as selling a property or refinancing, before you apply for bridging finance. Also, the interest rates offered with bridging loans are higher than other traditional bridging finance solutions.
Besides interest rates, it is also important to consider various fees associated with bridging loans. These fees include arrangement fees, legal fees, valuation fees, administration fees, and exit fees, which may significantly impact the cost of borrowing.
Furthermore, bridging loans are secured loans. That means you will need to keep a property or asset as security. Failing to repay the loan on time could lead to repossession of the property by the lender. Due to the high level of risk and complexity involved, it is advisable to consult experienced bridging loan experts only in the UK. They can assist in finding a reputable bridging loan lender and help you understand the full implications, so you can obtain favorable terms based on your circumstances.
Conclusion
Bridging finance offers practical and versatile solutions for homeowners and property investors looking to capture profitable opportunities. From breaking property chains and renovation projects to expanding business operations and undertaking development projects, the speed and flexibility of bridging finance make it an invaluable finance solution.
If you are considering using bridging finance in the UK, use the help of a professional bridging loan broker who can help you connect with the right lenders, offering fast bridging loans that best suit your needs.
