While it may appear to be a confusing issue, when it comes to explaining bridging loan funding it is important to understand the finance has many uses.
One reason why this form of alternative finance has taken off is that those accessing them are wanting a flexible and fast bridging deal to meet their needs.
So, what can a bridging loan be used for? The answer is that they are suitable for short loan periods and can provide an easy and cheap option when looking to raise required finance.
Bridging loans are also quick to arrange and have flexible criteria for the lending so someone borrowing money with a bridge loan will not, for most lenders, have to undergo extensive checks to ensure their suitability.
Indeed, some bridging loan lenders will offer finance of sizeable sums within a few days depending on the security being provided; bridge loans vary in size from a few thousand pounds to several millions.
It’s also important to appreciate the bridging finance can also be secured on a variety of property types that a mainstream mortgage lender, for instance, may not provide a loan for.
What bridging loans UK can be used for
That essentially explains what these loans are and this is a quick checklist on what bridging loans UK can be used for:
- Buying property at auction
- Buying property when in a chain
- Help a business resolve short-term cash flow
- Refurbishing or converting property
- Developing a property for selling on quickly
- Buying sub-standard property
Most people will have heard of a bridging loan because they have been traditionally used for buying property when someone is in the process of selling their home and buying a new one.
The money from the finance company effectively bridges the gap between buying a home and the proceeds from the current property being received.
And while they are still widely used for this purpose, the potential uses have increased which helps explain why they have grown in popularity.
Among the potential uses is for a property developer, or indeed a home buyer, who is looking to buy property at auction since they will need to act quickly should they win a bid.
Generally, they will need to pay a 10% deposit on the property on the day and then provide the balance within 28 days – though in some instances this deadline may be shorter.
Again, with most bridging lenders able to react quickly, they can provide the money within a few days or depending on the legal work, within a week or so.
Use the short term bridging loan to buy a property to renovate
Obviously, property developers can use the short term bridging loan to buy a property to renovate and sell on quickly while others may use the money to refurbish or convert property that a mainstream mortgage lender may decide is in such a poor state of repair they will not accept an application.
However, there’s also a growing trend for businesses to resolve short-term cash flow issues with bridging finance since they know they have money coming in to repay the lender.
Businesses as well as other potential borrowers can use bridging finance to enjoy a bargain whether that’s to buy a property or stock for a business.
The reasons why someone would be interested in bridging loans include:
- Lenders have flexible lending criteria
- Bridging loans are quick to arrange
- Property can be used for security
- Loans can be used to buy substandard property
- Buying unusual property
Indeed, depending on the size of loan, a potential borrower could use more than one property as security for a loan. For instance, a buy to let landlord wanting to develop their portfolio may be interested in this aspect.
Bridging finance means that large sums of money can be accessed very quickly and while a mainstream lender may take several weeks or months to arrange a loan, a bridge lender could meet a borrower’s need in just 48 hours.
Most bridging loan lenders have their own lending criteria
And while most bridging loan lenders have their own lending criteria, they will want to value the property that is being offered as security and the borrower’s ‘exit route’.
Indeed, this is an important part of the application process and means the lender wants to know how the borrower is going to repay the money when the term ends.
For someone selling a property, they will know they have money to repay the bridging loan when they receive the proceeds, while others may need to refurbish and then sell a property before earning the money to repay the lender.
It’s also worth appreciating that in the list above, a bridging loan can be used to buy an unusual property since most mortgage lenders will only provide a loan for a property that is deemed as being of standard construction.
This means a property that is an unusual or non-standard construction will struggle to find a mortgage lender interested in it but a bridging finance firm will have more enthusiasm.
Bridging loan funding has a variety of purposes
Finally, it is important to appreciate that bridging loan funding has a variety of purposes and with a wide range of lenders there’s no strict lending criteria which means someone looking for a short-term loan will find a lender willing to loan money depending on the borrower’s circumstances and their security but it’s for their flexibility that is key to the growing popularity of bridging finance.