How Do Bridging Loans Work? – A Beginner’s Guide

bridging loans explained

Many people dream of turning property development into a viable business or second income. House prices have increased by 33.7% on average in Britain over the past decade and forecasters are predicting a 15.3% rise in the next five years, s there is definitely money to be made for those who get it right. 

The majority of developers make a large slice of their profits from refurbishing properties and selling them on.

Whether you’re just starting or looking to expand your property development business, it can be difficult raising necessary funds to turn a rundown building into a saleable home.

Equally, you might find the perfect buyer for your property but if they are unable to sell their home quickly, delays could result in a lost sale.

A bridging loan can provide quick access to the money you or your client needs to keep a sale moving towards completion. Traditional lenders may be unwilling to authorise loans for projects they deem “high-risk”, such as renovation projects or to borrowers who do not meet stringent credit checks.

Bridging finance provides an alternative source of funding if mortgage lenders are unable to provide the required funds.  In this beginner’s guide, we’ll take a closer look at what bridging loans are and how they work.

What is a bridging loan?

A bridging loan is a short-term loan that an individual or company can use to fund the refurbishment or purchase of a property. They involve less red tape than high street funding and can be available much more quickly than standard loans.

Many companies do not require a credit check and decisions are made on a case-by-case basis. Typical loan amounts range from £100k to £2 million and repayment is generally required within 12-months.

What can I use a bridging loan for?

Bridging loans are very flexible and can be tailored to the specific needs of the individual or company. They can be used to fund the purchase or refurbishment of most types of investment property, from houses to land.

Many commercial enterprises use a bridging loan to help them buy a new property before another development sells.

Renovation projects are another popular use of these types of loans. Developers can use a bridging loan to restore a rundown property and sell it on for a profit.

Many high-street lenders view such projects as high risk and will not authorise a loan — but a bridging finance company that is unregulated by the FCA (Financial Conduct Authority) is bound by less red tape and can provide the capital a developer or individual needs to revamp a rundown property for sale.

Similarly, if you want to purchase a piece of land for development a bridging loan can help you to fund the purchase.

Property auctions are popular with developers and individuals seeking a bargain. However, buyers must be in a position to act quickly if they want to snap up the properties with the best potential for making a profit.

The exchange takes place at the auction and completion is usually required within 28 days. A bridging loan provides quick access to funds. The money may be released in as little as seven days after the loan is approved.

Bridging loans offer a fast, short-term finance solution. They can be used in many situations where an individual or company needs to raise capital faster than they could with traditional lenders and where they can repay the loan within a short period.

Some people use these loans to access funds while waiting for a mortgage to come through. The mortgage is approved and the borrower knows they will be in a position to repay the loan in a few months.

The benefits of bridging loans

Bridging loans are a valuable resource for developers who need to act quickly to secure a prime property or piece of land before a competitor.

They also provide a viable finance option when traditional lenders are reluctant to help. The benefits for individuals and companies include:

Speed

Gain access to large sums of money fast so you can act quickly to secure a property or refurbish and resell a building.

Flexibility

Use the loan for almost any property project, from purchasing land to refurbishing a rundown building.

Eligibility

Use a bridging loan for “high-risk” projects other lenders will not fund.

Skip the red tape

Provide some basic information and get a decision fast. Unlike traditional loans, there is no need for a credit check and lengthy application process.

No monthly repayments

If you have the assets to repay a loan but are struggling with cash flow, a bridging loan offers the perfect solution.

Is a bridging loan a good idea?

If you have the means to repay the loan within the agreed amount of time, a bridging loan can provide a solution to a temporary lack of capital.

When choosing a lender, consider the total cost of the loan — interest rates, exit fees — and make sure there are no hidden costs you are unaware of. Request a breakdown of the total cost and compare different lenders to get the best deal.

A bridging loan can be a great idea for developers and individuals needing quick access to funds. They can make the difference between seizing an amazing property development opportunity and missing out.

Provided due consideration has been given to the viability of repayment within the agreed terms, bridging loans can be an invaluable resource for people seeking property development success.

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