Bridging loans (and bridging finance) is a subject that has garnered an increasing amount of media attention over the last couple of years. The reason for this raising of awareness in the industry comes from a reluctance from mainstream lenders to approve large short-term loans for home owners and property investors.
Bridging finance offers quick access to funds, but does come with interest rates higher than the norm. This is because they are designed to be paid off quickly and swiftly. Borrowers apply for them due to needing quick access to funds, mainly concerning property purchases. The lenders know this and so are able to raise interest rates appropriately.
To give them their due, bridging finance lenders do offer very flexible terms and have a bespoke approach to underwriting in a niche area where high street banks and building societies cannot compete. This is a view that was recently highlighted on the Mortgage Strategy website.
Who Should Use Bridging Loans and Finance?
People who use bridging finance and loans will typically be professional commercial property investors… and ones that have a large portfolio with strong assets. However, with recent changes to how mortgage applications are now approved, there has been an increase in residential home owners turning to bridging loans in order to finance the purchase of a new home, before the sale on their existing one has completed.
A common scenario where bridging finance could be used is where a person owns a house that they are looking to renovate for sale and profit. Renovations can be costly, and so bridging loans can be secured to pay for the work before the sale… and then once the project is completed the property can be sold on, and the short-term bridging loan paid back in full.
Many banks and building societies are no longer as forth-coming to offer finance and re-mortgaging options in scenarios like this which is why the bridging loans industry has popped up over the last few years.
The Different Types of Bridging Loans
Whilst bridging loans all have the same premise, they can be broken down into different types to suit varying scenarios. Here are short overviews of each one (with some descriptions adapted from this finance broker).
The Classic Bridging Loan
As outlined in the article, the classic scenario where bridging loans are used is to bridge the financial gap between selling a property and financing the next one. The most common example where a classic bridging loan will be used is when a property buyer want to finance the purchase of a new house in advance of the sale on the existing home.
The Debt Bridging Loan
Typically used when a person needs to pay a large bill or debt very quickly. Debt bridging loans are only really suitable for people who have a large portfolio of assets, but not any cash flow at the time the payment needs to be made. As an example, these are often used for things like unexpected VAT invoices, meaning the borrower can pay the bill, and repay the bridging loan later using the sale of an asset.
The Refurbishment Bridging Loan
Those that invest in run-down properties in order to bring them up to standard and then sell them on will often find it hard to secure mortgage offers from high street or classic lending institutions such as banks and building societies. These type of bridging loans let the borrower get funds to buy and renovate the property before applying for a classic mortgage on standard terms and interest rates.
The Rescue Bridging Loan
The recession saw many property investors lose parts of their portfolio when finance was pulled from them by the banks. Rescue bridging loans let investors get quick finance as an interim measure whilst they look to secure more solid and affordable finance terms and agreements.
The Medium Bridging Loan
There are new bridging loans now on the market which are arranged as two to three year loan agreements. Whilst some brokers don’t classify these as bridging loans in the true definition, they are being sold by bridging loan companies and are occasionally a little bit more affordable than classic mortgages.
Conclusion: The economic downturn of recent years has led to an increase in demand for bridging finance, with a cottage industry popping up almost overnight in order to satisfy this need. Banks and building societies made it more difficult to approach large loans over the short-term for property purchase in order to help the housing market survive.
The ironic thing is that the result saw bridging loans emerge which actually look like they could be a contributory factor in the housing market now starting to show signs of recovery due to them helping the chain move quicker.