Bridging: What is it good for?
For the right client, in the right circumstances, bridging can be a valuable funding tool.
Bridging loans, or short-term secured loans as they are often known, is a method of financing the purchase of a property for a short period of time, typically until the buyer receives an anticipated inflow of cash such as the sale of their existing property.
In other words, this short term secured loan ‘bridges the gap’ until the buyer is in a position to finance the purchase in a more standardised manner.
There are many situations in which bridging could be suitable alternative.
1. You’ve found your dream property but cannot sell your current one
Searching for a new home is an exciting time but it can also be a bit gruelling; you often have to view a lot of ‘frogs’ before you find your ‘prince/princess’! So when the time comes and you find your ideal property, it is understandable why you would do anything to make sure it doesn’t slip through your fingers.
However, there aren’t many people who have the financial luxury to be able to buy immediately; they are reliant on the sale of their current property to fund it. So if they are struggling to sell, a bridging loan can help finance the move until the existing property is sold.
2. Buying a property at auction
Some people are not aware of the time restrictions that apply when buying a property at auction; such a purchase has to complete within 21 to 28 days. A standard freehold purchase will normally take 4 – 6 weeks (although if there are problems with the title deeds, it could take longer) and therefore would not be suitable for an auction property purchase.
A bridging loan would ensure the purchase completes on time. The owner would then be able to switch the loan to a standard mortgage.
3. Purchasing a property in need of refurbishment
A bridging loan can be a bit of a life saver for the property visionary; the kind of person who looks at a dilapidated shell of property and sees its potential.
You are unable to get a mortgage on a building without a bathroom (e.g. a barn). You can however take out a bridging loan and, once all the preliminary refurbishment has been completed, you would then be able to apply for a standard mortgage.
4. Buying property off-plan
Similarly to buying a property in need of significant refurbishment, buying off-plan can create a journey littered with obstacles which could make securing a mortgage offer difficult; a lender can be quite reluctant to stump up the cash for something they have not seen.
Buying off-plan, like an auction property, can often be a cheaper alternative, making it an alluring prospect. A bridging loan could help the buyer ‘bag the bargain’ who can then apply for a mortgage after it is built.
5. Previous mortgage offer has expired and are unable to get another one
If the purchase of a property has moved a little slower than initially anticipated, you could find yourself in a position where your mortgage offer has expired and you are unable to get another one confirmed in time for completion. Chances are you would have already invested some degree of money into the property (valuations, searches etc.) and are therefore reluctant to just walk away.
A bridging loan could offer a financial stopgap until you are able to secure another mortgage offer, meaning your investment has not gone to waste.
Bridging loans should never be seen as a long-term financial option; a typical term lasts from one day to a year. As you may expect, bridging can be an expensive alternative and should only really be used in specific situations where a cash injection is required quickly.
Goldsmith Williams advises anyone considering a bridging loan to ensure they have a realistic exit strategy in place to minimise the total cost.
Content correct at time of publication