buy to let mortgages
Bridging Finance - How does it work
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Bridging Finance
Sometimes, investors need quick access to funds to secure a deal or get things done fast, and traditional mortgage routes may not provide the speed required. This is where bridging finance comes into play. In this article, we’ll explore what bridging finance is, how it works, and when it might be the right solution for you.
What is Bridging Finance?
Bridging finance, or a bridging loan, is a short-term loan to be used for a specific purpose. It might be used to ‘bridge’ the gap between the purchase of a new property and the sale of an existing one. It could be used to make a property habitable prior to a mortgage application.
It’s a useful tool for property investors, developers, and even homeowners who need to access funds quickly. These loans are typically used for a few weeks to a few months, though some can extend up to a year or more.
How Does Bridging Finance Work?
Bridging loans are secured loans, meaning they require collateral, usually the property being purchased or another property owned by the borrower. Here’s a step-by-step guide on how bridging finance works:
Application and Valuation: The process begins with an application, where the borrower details the property involved and the purpose of the loan. The lender will then carry out a valuation to assess the property’s value.
Loan Offer: Once the valuation is complete and the lender is satisfied with the borrower’s information and collateral, they will make a loan offer. This offer will include the loan amount, interest rate, and terms of the agreement.
Legal Process: This involves checking the title of the property and ensuring all legal requirements are met. Both parties will have their legal representatives to facilitate this process. The Mortgage Offer can be withdrawn even at this stage, if, for example it transpires that the property does not have planning permission for the use intended.
Funds Release: Upon completion of the legal checks, the funds are released to the borrower. This can happen very quickly, often within a matter of days.
Repayment: The borrower repays the loan either through the sale of the existing property, refinancing through a traditional mortgage, or other means agreed upon with the lender.
Types of Bridging Loans
There are two main types of bridging loans:
Closed Bridging Loans: These loans have a fixed repayment date. They are typically used when there is a clear exit strategy, such as a confirmed date for the sale of an existing property.
Open Bridging Loans: These loans do not have a fixed repayment date but are usually expected to be paid off within a year. They are suitable when the exact timing of the exit strategy is uncertain.
When to Use Bridging Finance
Bridging finance can be particularly useful in the following scenarios:
Property Chain Break: If you’re caught in a property chain and the sale of your existing home falls through, a bridging loan can provide the necessary funds to proceed with your purchase.
Auction Purchases: Properties bought at auction often require quick payment. Bridging loans can provide the funds needed within the short timeframe.
Renovations and Refurbishments: Investors looking to buy a property to renovate and then sell or refinance can use bridging loans to cover the purchase and renovation costs.
Development Projects: Property developers often use bridging loans to finance the development of new properties or the conversion of existing ones.
Pros and Cons of Bridging Finance
Pros:
Speed: One of the main advantages is the speed at which funds can be accessed. This can be crucial in competitive property markets.
Flexibility: Bridging loans can be tailored to suit the specific needs of the borrower, with flexible terms and repayment options.
Opportunity: They provide the opportunity to secure a property or complete a project that might otherwise be lost due to a lack of immediate funds.
Cons:
Cost: Bridging loans can be more expensive than traditional mortgages, with higher interest rates and fees.
Risk: As with any loan, there is a risk of default, which could result in the loss of the secured property.
Short-Term Solution: They are not a long-term financing solution and should be used as a temporary measure.
And finally....
For more detailed advice and tailored solutions, feel free to contact us at Mortgages Direct, where we can guide you through the process and help secure the best financing for your needs.