There are many reasons to use a bridging loan. The most common use is to complete the purchase of a house while waiting for an existing house to be sold, but there are many other reasons to apply for a bridging loan.
It is difficult to obtain a mortgage from a standard lender for residential property that is not fit to live in. A bridging loan provides the short-term finance to carry out the necessary renovations to make the property habitable. Renovations could be nonstructural, such as installing a new bathroom and kitchen, or the property could need major structural repairs. After the house is fit to live in, it could be sold on, used by the purchaser for their home, or rented out to tenants.
With standard mortgages, it can often take weeks from the initial application to the time when the funds become available. If property is being offered at a below market prices for a quick sale, then it is important to have the finance available to quickly complete the sale. Bridging finance can be arranged in a matter of days, and used to secure the property until more long-term funding is available.
Property bought at auction requires full payment, usually within about four weeks after the winning bid has been accepted. Again, a bridging loan provides the short-term finance to complete the purchase until a standard mortgage is available.
Though the majority of bridging finance is used for property purposes, there are non-property uses for bridging loans. If a business is experiencing low cash flow, a bridging loan can help pay the expenses until business picks up again. This is particularly helpful for seasonal businesses that have a low turnover in their slow season.
Bridging loans for between three months and three years are available for property developers who plan to construct residential or commercial property. These loans can be used for both purchasing land and then completing the development.
There are also loans available for developing existing buildings. For example, a public house can be converted into a restaurant and living accommodation. Commercial buildings may be converted to residential use.
Security and exit strategies
Most bridging lenders will require security, usually in the form of property. They will also need an exit strategy, which is a plan of when and how the bridging loan will be repaid.
One of the most common exit strategies is to have a long-term mortgage arranged which will be used to pay off the bridging loan. If a developer is relying on the sale of property to provide the funds to pay back the loan, then they must be sure that there are prospective buyers or that there is a high-demand for the type of property they are developing.
If you need a bridging loan, and have a clear exit strategy, then talk to Ascot Mortgages, who can match your needs to the best bridging finance lender.