Bridging loans are a short-term financing solution that allows those with equity in property and other assets leverage that equity in order to obtain finance. Sam Covington of bridging loan broker Finbri says “Whilst a bridging loan can be used for any purpose, we see typical borrowers funding the purchase of land whilst gaining planning permission, auction property purchases, stopping a chain break when purchasing property and funding light renovations for buy to lets or buy to flip”

We’ll cover what you have to understand regarding bridging loans in this article.

What is the concept of a bridging loan?

What is a bridging loan, exactly? 

A bridging loan (also known as bridge finance) generally entails borrowing quite significant quantities of cash for a short period.

It’s a type of financing that can literally bridge a gap in an individual’s or company’s finances. The loan security operates by placing either a first or secondary charge upon your asset, which is typically residential or commercial property, for an agreed term of usually no more than 12 to 24 months, although it may be for a period as little as 30 days.

What is the procedure for obtaining a bridging loan?

High-street banks aren’t well represented in this area of financing, with only a few offering bridging loans, so you’ll likely require a specialist provider which will be via either a broker or a lender. The procedure follows the same steps as any other credit request, including an appraisal of your needs, basic due diligence, and a review process.

What are the bridging loan rates?

Like mortgages, bridging loans are available with fixed or variable interest terms. A fixed-rate provides additional security with a defined rate for a specific duration. If the bridging loan you’ve taken is both a fixed rate loan and serviced monthly, meaning that you pay the interest back each month, then you will be able to better plan your financial outgoings since you will understand the exact monthly charge of your loan. A variable interest rate may have a cheaper starting monthly payment, but it is vulnerable to various monetary policy and economic factors beyond your control. 

What are the requirements for getting a bridging loan?

Lender requirements will vary based on the type of loans they are willing to finance. Many lenders have a speciality area they like to lend for, which is usually the loan types they feel they best understand. It could be land deals, auction finance, refurbishments etc or it could be a regional speciality. This is when a broker can help. A broker will be able to match the right lenders to the borrower’s needs. A good broker aims to put the loan request out to the whole of market so that they can obtain competitive quotes. As a borrower the basic requirements for obtaining a bridging loan are that the borrower legally own, and have adequate equity in, the security they’re offering; they agree to the terms of the loan; and they have a viable exit strategy to repay the loan. 

Is a bridging loan subject to regulation?

Both regulated and unregulated bridging loans exist. A bridging loan needs to be a regulated loan where the borrower is to inhabit the property put up as security. This type of regulated bridging loan is commonly, but not solely, required during chain breakdowns or rapid investments before disposing of their current property.

Unregulated bridging loans are those in which the lender will not inhabit the security property and will be typically employed for investment or commercial purposes. These are the most frequent bridging loans, and foreign buyers purchase land buildings and fund construction projects.

Conclusion:

Bridging loans are short-term financing that allows those with property to raise finance for their initiatives. A bridging loan can be employed for various purposes, including purchasing land, property, paying light refurbishments and small renovations, and gaining planning permission. These loans must be repaid after the term and that term is likely to be no more than 24 months. High-street banks rarely offer these types of loans, so you’ll have to find a specialised broker or lender.

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