From property purchases and development to short-term business capital, there are a range of circumstances that make bridge finance a good option to consider. This guide explores the main reasons people choose to use bridging loans in more depth.
What is a bridging loan?
A bridging loan is a short-term loan that can bridge a gap in your finances. The loan will be secured against a property or commercial asset, and you will usually be expected to pay it back within 12 months. While it does depend on your circumstances, a bridging loan can be a good option in a range of situations. However, it is important that you get expert advice from a reputable specialist lender or broker.
Here are the main reasons to consider a bridging loan:
1. To buy a property while waiting for your current one to sell
Currently the most popular reason to choose bridge finance, you can use a bridging loan to complete the purchase of a new property while you are waiting for the sale of your current one to go through. This can be particularly beneficial if you find yourself caught up in a sales chain or an unexpected delay in your property sale. It means you can progress with buying your new property and then repay the bridging loan when equity is released from your previous home.
Most lenders will lend up to 80% of the maximum Loan to Value (LTV) limit. However, some specialists such as Finbri will consider up to 100% with a 100 bridging loan.
2. To buy land before planning permission is granted
As planning permission is often required before a mortgage company will provide a long-term loan, using a bridging loan to buy the land is an option to consider. Provided you are confident that the planning permission will be granted, you can then buy the land, and repay the loan from the mortgage, once it is in place.
3. To obtain short-term capital for your business
You can also use a bridging loan to inject short-term working capital into a business if it experiences a seasonal drop in cash flow or needs to buy new stock or equipment.
4. If you have been refused credit
Poor credit history can prevent a borrower from obtaining a standard loan or mortgage, so some bridging finance lenders will consider granting a bridging loan. However, the lender will need to use their property or commercial assets as a guarantee to secure the loan.
5. To buy a property quickly at auction
With a standard mortgage or loan application taking at least 28 days to complete, a short-term bridging loan can be used to buy a property quickly at auction and then reimburse the loan once the longer-term mortgage has gone through.
6. To pay an unexpected tax bill
A business could receive an unexpected tax demand, which it may struggle to pay in time. In this incidence, using a bridging loan to pay the bill by its due date can save the company additional expense of late payment charges.
7. If you want to develop an unlivable property
And finally, a bridging loan could be used to buy a dilapidated or inhabitable property, which a mortgage lender would be unwilling to cover. The loan could be used to buy and pay for the necessary construction work to bring it back into a liveable condition that can be confidently mortgaged.
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