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January 23, 2020

Bridging loans 101 for property professionals

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Whether it’s to purchase a property, launch a business project or do some refurbishment, there are all kinds of reasons why an individual or business might need a short-term cash injection.

But how do you get such funding quickly and easily? One answer is a short term loan, often referred to as a bridging loan, a solution that’s growing in popularity. Let’s find out more about this type of finance and discover how it can help property professionals.

Bridging finance? What’s that?

Bridging finance is intended to fill (bridge) a short-term funding gap. Traditionally, bridging loans were solely used to help property purchases go through when a hitch occurred. For example, if a sale is delayed due to a broken chain, the owner can take out a bridging loan to enable them to buy a new house before they’ve sold theirs. Once the transaction’s completed and they’ve received the funds, they repay the loan.

But bridging loans are a useful fix in the property development world too. Their nature means they can be helpful to entrepreneurs and developers who need to fill a temporary funding hole in a variety of circumstances.

What’s so special about bridging loans?

So, what exactly about bridging loans makes them so attractive to property professionals? Here are four of their top advantages:

1. You can get loans of all sizes

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As well as interest-only and secured by the property, bridging loans are highly flexible in terms of value. If you’re an SME developer who only needs £50,000, a bridging loan could be the ideal solution if you’re struggling to find a high street lender willing to loan under £1m. Equally, if you’re after a much larger sum – like £50 million – then that may be possible.

2. You won’t face high barriers to lending

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If you want to purchase a property that needs a lot of TLC, you can run into problems if you seek finance from a traditional lender. Why? Because they often won’t loan money if the property’s uninhabitable.

On the other hand, bridging lenders are usually happy to make their decisions based on the property’s current value rather than its condition. So, you’ll probably find a bridging loan easier to get.

3. You’ll get a speedy turnaround

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Arranging a bridging loan is far less arduous than applying for a mortgage. You’ll still have to go through credit checks and property valuations, but you won’t necessarily be subjected to stress tests and affordability checks. This means things could move much more quickly, so you should get faster access to your capital.

Equipped with years of experience delivering specialist finance, here at Vantage Finance we are able to approach bridging loan applications with speed, typically able to complete within a month.

4. You won’t pay early repayment penalties

 

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This is useful when you don’t know exactly when the job will be finished. You’ll still find there’s a date by which the loan will need to be paid back – usually around the 12-18 month mark. But you generally won’t be penalised for early repayment, so you can pay it off whenever you’re ready.

How exactly can bridging loans help property professionals?

So we’ve looked at some of the benefits of bridging loans compared to traditional finance. But in what sort of situations can they help property professionals? Here are three scenarios where fast, flexible, short-term finance could be just what you need:

1. Buying a property at auction

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When you buy a property under the hammer, you’ll usually have to pay the deposit straightaway and the balance within 28 days. If you try to get a loan from a traditional lender, the application processing time could make everything very tight and cause the deal to fall through. But if you get a bridging loan, you can shake hands while your development finance is being finalised.

There are other ways in which bridging finance can help with auction purchases too. As we’ve seen, you can get a bridging loan for uninhabitable properties that can’t be mortgaged – so you’ll have the funds you need to get them into shape for longer-term finance.

2. Buying a property that doesn’t have planning permission yet

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Often planning permission must be in place before a development finance lender will approve a loan. But a bridging loan can be an ideal stop-gap solution if you’re confident permission will be granted. Once it’s been approved, you can switch to longer-term development finance.

3. Completing renovation or construction projects

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If you’re in the middle of a renovation or new build project, you might come up against cash flow problems. Maybe you unexpectedly need to buy extra equipment or want to bring in another pair of hands. A bridging loan could be the perfect answer, giving you a boost to your working capital.

But it’s not just these three scenarios where a bridging loan could help you. They can get you out of many other tight spots where a short-term cash injection is needed.

Historically, bridging finance was seen as a very expensive method of financing property, with high rates and high costs from the outset and this has led to some negative connotations remaining in the wider market. The good news is that bridging finance interest rates are now extremely competitive, with recent averages of 0.89% (Q1 2019 – West One Loans bridging index).

The typical client profiles taking out this type of finance ranges from experienced property professionals looking to maximise their investment income all the way to Mr and Mrs securing their dream property. So, whatever your circumstances, don’t overlook bridging finance as a possible solution.

If you’d like a chat about bridging finance, a meeting to discuss options or an answer to that burning question, give our experienced team a call today on 01753 883195. Or drop us a line instead.

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