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What is Bridging Finance and How Does it Work?

 

Bridging Finance

Bridging finance is a type of short term secured finance dependent on a viable exit strategy.

The common problem: you’re looking to buy a house, but you’re still locked in the property chain waiting for else someone to buy your old place off you. In today’s shaky property market, with cautious banks and building societies reluctant to lend, with high mortgage rates and deposits, and lower house valuations, money lenders have found a solution for helping you finance the purchase of your next property. Introducing: Bridging Finance.

Bridge loans are short-term loans (generally lasting between 1 day and 1 year) that are intended to bridge the gap in your finances, enabling you to complete the purchase of your new home before successfully selling your old one.

Chained to your old House?

Selling a house can be expensive, especially when you are locked in a chain. The expense of taking out a short-term bridge loan might actually curb your longer-term losses. This ability to quickly access funds can minimise the stress of the ‘waiting game’ whilst your previous home is on the market and enables you to quickly complete the purchase of a new property and regain the stability of having a new home for you and your family to settle into.

Bridge funding can also be used by landlords, property developers, and those looking to buy properties at auction.

Bridging loans are, however, still loans and carry the financial risks associated. You must ensure you have the financial means to be carry the burden of another loan before you attempt to take one out.

Bridge loans are not always used for property and they definitely aren’t always used for examples like this. In fact, they can be used for almost anything as long as you tick certain boxes with regards to security and realistic repayment dates. If you’re not sure, feel free to ask. If bridge financing isn’t appropriate we will happily point you in the right direction.

Your Bridging Options

The type of loan you go for depends entirely on your current situation in regards to buying a house. If you have already sealed the deal on a new house by exchanging some kind of cash or signing a contract, you will be more readily accepted for a loan. Likewise, if you can prove your own home is on the market then the chances of you getting a loan, and with better rates, will be higher.

There are also bridging loans available to those who want to sell their house and are interested in buying a new one, but have not yet taken steps towards the selling of their home. This type of bridge funding will be the most challenging and expensive to get.

The length of your bridging loan, and the rates and costs associated, are all dependent on the progress of the purchase/sale of your property and your financial situation/credit rating. The types of bridging loans available are split into two groups: open bridge loans and closed bridge loans.

Open Bridge Loans

Open bridge loans are for buyers who are interested in buying a property but have no pending sale on their old house. Perhaps their home is not yet on the market. Achieving these types of loans is more difficult and potentially more risky, as it is assumed they will last a longer duration than closed bridge loans. To secure an open bridge loan, a person would have to prove to a lender that they are capable of paying the loan off – even in the event of their house not selling. This could include providing proof of a good credit rating or even using the value of their existing property as collateral.

Open bridge loans carry a higher element of risk for both you and the lender. For this reason, they come with higher interest rates.

Closed Bridge Loans

A closed bridge loan is offered when the transactions for the sale of your old property and purchase of new property are already confirmed, but extra funds are needed quickly to complete the purchase.

Once contracts have been exchanged for the sales of a property, they rarely fall through. For this reason, lenders face less risk when offering customers closed bridge loans and can do so at much lower rates. You may not even have to disclose your financial situation or credit rating to a lender to acquire a closed bridge loan, and loans are often needed for a much shorter duration than open bridge loans.

A Bridge too Far?

As with all loans, only consider taking bridge funding if you can financially support it and it is the right choice for your particular circumstances.

A valid case for using bridging finance goes beyond simply wanting money quickly to buy a new home. If this is your sole motivation, perhaps it would be worth while waiting a little longer for someone interested in buying your property.

You could also consider more traditional routes, such as speaking to a mortgage adviser about a loan.

If you have decided that bridging finance is the right choice for you, remember to have an exit strategy in mind before signing any paperwork. In the case your property does not sell, you do not want to find yourself owing the money lender your house.

Where can I get a Bridge Loan?

You have many options when looking for a bridging finance loan. You can go direct to a lender, look for a private lender or get an experienced broker who can use their market experience to find you the right deal, with great rates that suit your individual requirements.

Remember to do your own research and ask many questions – choosing to take a loan is a very important decision to make.

Get in touch today for some free and impartial advice. We usually don’t charge any fee’s for finding you fantastic deal quick. If your circumstances mean that we will be likely to charge, we will be up front and tell you about any costs straight away. You have nothing to lose by getting in touch today!

 

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About

Alan has been a financial adviser for a number of years now specialising in mortgages and bridging. Alan is the managing director of Hampshire based mortgage broker “Mortgage Integrity”. Before financial advising, Alan spent a number of years doing property development and his first introduction to bridging finance was a loan he was taking out in order to develop a property! The many years Alan spent in property development and the many times he personally required bridging finance gives him a unique perspective and understanding from both sides. Alan’s contacts in the property development industry gives him insider access to hot, off-market property deals so drop him an email if you would like some info.

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