A bridge loan is a form of short-term finance that is typically provided for terms between 1 to 12 months, however, they may have longer terms of up to 36 months in some cases.
They are used, as the name suggests, to bridge the gap in a person’s or company’s finances between the urgent need for payment and the waiting period before other funds become available.
What Is A Bridging Loan?
Short-term financing comes in many shapes, from personal loans, factoring, and commercial finance, to Bridging loans. Each type of financing is different and has its own specific best-use case and its own nuanced fee structure.
Bridging loans in the UK tend to be used where the person requiring the loan, the borrower, has a property asset that they wish to leverage in order to obtain a loan. It’s relatively easy to obtain a bridging loan provided the basic criteria are met, typically that there is enough equity remaining in the property that the borrower wishes to use as security.
As Stephen Clark from Finbri, a bridging loan specialist comments, “Since 2008 the traditional banks that used to once offer bridging facilities no longer do, or where they do, they limit their risk by only offering loans to existing, long-established customers.
This has led the way for alternative lenders to fill this lending space, offering niche short-term residential and commercial-orientated financial products to individuals and companies.” There are more than 200 alternative lenders in the UK most of which specialize in lending for very specific needs.
For example, some only focus on emergency bridging loans that need to be completed within 3 working days, some seek to only loan to property investors for light or heavy refurbishments, and others only lend to the agricultural sector.
Although bridge loans can be used for a variety of purposes, it is most frequently used to pay for property purchases or one description or another, such as buy-to-let investments, buying from distressed sellers facilitating a below-market value acquisition.
Other typical uses include: settling personal or company tax obligations, business investments and endeavors, and even divorce settlements.
When Does A Bridging Loan Make Sense?
There are a few key situations in which taking out a bridging loan can be a helpful financial move. A bridging loan is most typically used in the following scenarios:
1. Buying A New Property Before Selling The Previous One:
When looking to purchase a new property, and the funds are tied up in the existing property that is yet to be sold, bridging finance can be used to finance the purchase of the new property before the sale of the old property completes.
This type of loan is most commonly used in situations where the borrower is needing to move quickly. Situations such as solving property chain breaks, seizing a time-critical investment opportunity, or simply a change of life circumstance such as relocating to a new job could all be valid reasons for using a bridging loan.
Because the loan can be used to buy the new property outright, it removes the need for a chain and positions the purchaser as a cash buyer thus speeding up the process.
2. Renovating A Property To Sell:
When planning to renovate a property in order to sell for a profit, a bridging loan can be used to provide the necessary funds used to cover the costs of renovation. In this instance, the loan enables the borrower to complete their project when they don’t have alternative sources of funding such as savings.
The bridging loan can provide the necessary funds for the refurbishment of all types of properties including buy-to-lets (BTLs), residential properties, commercial properties, and many more.
3. Buying A Property At Auction:
When purchasing a property at auction, the deposit is required on the day of the hammer going down on the winning bid and the rest of the funds will need to be available within 28 days.
In order to make the purchase, a bridging loan can provide almost immediate cash, affording the would-be auction goer the advantage of seizing opportunities as they arise.
A bridging loan can be used to purchase a variety of properties ranging from residential and commercial property to agricultural and land purchases.
4. Traditional Banks Unwilling To Lend:
A bridging loan can be used when traditional banks won’t provide the loan because the borrower’s requirements are too big, complex, or specialist. As a bridging loan is able to be secured upon multiple assets, even if they are considered unconventional, the lenders are generally willing to accept the higher risk profile of unusual requirements.
What Else Can A Bridging Loan Be Used For?
- Inheritance tax (IHT): Paying inheritance tax can be a difficult and stressful process, especially if you are new to the process or do not have the available funds when the tax is due.
IHT is payable on estates worth over £325,000 (nil-rate band remained the same since 2010), at a standard rate of 40%, so it is not often uncommon for people to need to find a large sum of money to pay IHT.
- One of the main issues with paying IHT is the duration it can take to get the finances together to pay. In some circumstances, it can take months or even years to sell assets such as property in order to raise the necessary funds.
- Another issue with paying inheritance tax is that the money must be paid before you can apply for a Grant of Probate. This can cause problems if you do not have the finances readily available, as you will not be able to access the assets of the estate until the tax has been paid.
This can delay the distribution of the estate and cause further issues for beneficiaries who are waiting to receive their inheritance.
- Property flipping: When looking to buy a property, renovate it, and sell it for a profit, a bridging loan can provide the necessary funds to either cover the purchase, the costs of renovation, or both.
- Business purposes: A bridging loan can be used for a variety of business purposes including expansion investment, buying premises, investing in new equipment, tools, or plant, stock purchases, or even expanding a workforce.
- Divorce settlement: Where the marital property sale is taking longer than expected, or where there’s an urgency for the owners to live separately, a bridging loan can offer a fast way of releasing the capital of a property, and this is sometimes referred to as a divorce bridging loan.
How Much Can Be Borrowed Using A Bridging Loan?
Depending on your circumstances, the nature of your requirements, and the equity available in your security, a bridging loan can be completed within 3 business days for loans below £200k, within 7 working days for loans below £700k, and within 14 days for loans up to £250m.
The bridging loans available in the UK market vary between £25,001 to £1,000,000,000 but are typically offered between £26,000 to £10,000,000.
How To Qualify For A Bridging Loan?
The eligibility criteria for bridging finance will vary due to the circumstances, but there are some general criteria that should be considered. This includes; the amount of equity in the property, the LTV (loan to value) ratio, the overall purpose of the loan, the borrower’s ability to repay the loan, and the exit strategy.
Final Thoughts
A bridging loan can be a useful tool for a variety of purposes, including when buying a property at auction, when traditional banks are unwilling to lend, paying inheritance tax, flipping properties, or for various property development attributes.
Bridging loans can be completed quickly and for large amounts of money, making them a good option for those in need of fast financing. To qualify for a bridging loan, you will need to have equity in your property and a solid exit strategy.
Ella Marcotte
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