There are many situations in which completing a property purchase in a short timeframe can be exceptionally useful. Unfortunately for many buyers, it’s somewhat difficult to move quickly when relying on a bank to finance a property purchase, as mortgages can take months to arrange satisfactorily; by the time finances are put in place, the opportunity has usually passed. An alternative is clearly necessary, and though it may be poorly understood by some people bridging finance is often an ideal solution.
Throughout this guide we’ll be examining the needs and requirements of making a swift property purchase, as well as how this can benefit both the buyer and the seller. It’s important to remember that as with any financial product, bridging loans have an interest rate associated with them. As a form of secured finance bridging loans enable lenders to reclaim assets if a loan goes unpaid, so it’s important that anyone considering bridging finance as a solution consults a financial advisor before deciding to proceed further.
Completing a property purchase quickly might seem like a luxury rather than a necessity, but there are many situations in which being able to resolve a sale in a short space of time can be exceptionally valuable. There are certain opportunities which can only be secured by acting quickly, and being able to close the sale quickly is vital to making the most of these. A common scenario that requires a fast property purchase is buying at auction, where the full value of the property must be paid within 30 days of submitting a bid. This timeframe is much too constricted to be met with a mortgage, which often takes 30 days simply to receive a decision in principle, and requires a faster, nimbler form of finance.
Even if a property isn’t being bought at auction, time pressures can still exert a powerful influence on the sales process. If a seller is highly motivated to close a sale quickly it’s often possible to acquire property at a substantial discount; if they have to settle an inheritance tax bill, for instance, the estate’s executor’s might well accept a much lower sale price - if the buyer can close quickly. Even when the seller isn’t under a great deal of pressure to sell, they might prefer to accept a quick cash offer rather than a heavily encumbered mortgage payment - the promise of quick completion is often enough to convince a seller to choose one buyer over another.
The flexibility of fast purchase finance makes it an appealing choice for professionals in many different fields, and the various applications to which it can be put make it an appealing solution. Some of the most common clients for fast purchase loans are property developers, who need a quick way of jump-starting development projects. In many cases, bridging loans are designed specifically for the needs of the property development industry, and come with terms tailored to each individual client.
Property developers are not the only customers for bridging loans, though, and buy-to-let landlords will often also make use of fast purchase finance. The adaptability of a bridging loan makes it ideally suited to taking on properties in need of refurbishment, and as mentioned previously the high speed at which bridging loans can be provided makes it a perfect fit for auction purchases.
In fact, bridging loans are also a potent tool for use in the private residential sector, where they enable buyers to speed up a property purchase. Just like mortgage lenders, many bridging providers are regulated by the Financial Conduct Authority (FCA) and able to provide loans for the purchase of owner-occupied property (however this is not a default, and there are also many lenders who do not offer this form of finance).
A typical fast property purchase can be broken down into three phases; application, draw-down and repayment. Firstly, the application phase is where a borrower identifies their needs and provides information to the lender. They will need to supply details of the property which they intend to purchase, the duration they will need the loan for and how much they intend to borrow. They will also often need to provide evidence of their suitability for the loan, and a reliable “exit strategy” for repayment once the term expires. Upon application, the lender will determine whether the loan is viable or not, and will agree to a loan “in principle”; this is a commitment to lend, but is not legally binding. Because bridging lenders are typically much smaller than large high street banks these decisions are often provided very quickly, usually within 24 hours (and sometimes on the spot). The lender will then arrange for an independent valuation of the property to be made in order to ensure that the property has been accurately assessed, and will proceed with the loan.
The draw-down phase occurs when the funds are actually provided to the borrower. Depending on the lender this can be in as little as a few days after the initial application, but a typical interval will be about 7 days (this is still much, much faster than any bank). The funds will be transferred to the borrower and can immediately be used for their stated purpose. As a short term form of finance, bridging loans are usually charged at a monthly rate of interest, and interest payments can either be serviced monthly or “rolled up” until the end of the loan.
Finally, the repayment phase of the loan occurs when the initial loan term expires; at this point the borrower will need to fully repay the loan with any outstanding interest. In property development this usually occurs in one of two ways; the property’s owner will either sell the property and use the proceed to repay their bridging loan, or will acquire a mortgage instead. The use of a bridging loan has enabled them to begin a project quickly and confidently whilst still maintaining profitability; this is why fast purchase finance is so valuable, and why bridging loans are an ideal solution.
A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.
Loans generally range from £10,000 to £50M with smaller or larger amounts provided on an exceptional basis. The value and equity within the property or properties you are securing against will determine how much you can borrow. The maximum loan to value (LTV) currently offered by most lenders ranges between 65-80%
Many lenders can agree terms in hours and funds can be in place in days rather than weeks. Average completion times with some lenders can be in the range of just 7-14 days. When you require speed to take advantage of a time-limited opportunity Bridging.com can help you to find the best lender for your unique circumstances.
Given that bridging loans are asset backed many lenders won’t credit score or ask for personal guarantees. They will look at where you are going rather than where you have been, placing an emphasis on the exit, how the loan will be repaid, rather than focussing on any arrears, CCJ’s or adverse credit history.
Most lenders will accept security on residential, commercial, and mixed residential and commercial properties. Some will accept security on land with planning permission and some even on purely land or other assets.