A bridging loan can be a quickly and easy way to get a loan in the short term. In contrast to getting a mortgage which could take months, a bridging loan can be in your account in between 2 to 4 weeks. Generally, bridging loans are used by property owners, developers or investors, often when they are urgently looking to complete on a property and a traditional mortgage would take too long.
Bridging loans allow you to borrow anywhere from £50,000 to £25 million and receive the lump sum in 2 to 4 weeks, sometimes sooner. Finding a bridging loan can be difficult but by using a broker like Octagon Capital you will have an advisor to ensure you get the best rates and terms for your unique situation.
How does it work?
To secure a bridging loan you will need to agree the terms and rates with the lender, usually through a broker, and put down a deposit. The money that you borrow will be held against the property. A bridging loan is only designed to be used as a short-term measure, which is why the interest rates are generally higher than something like a mortgage. find out more about the cost of a bridging loan here.
What are the advantages of a bridging loan?
One of the big advantages to a bridging loan is the speed with which it can be processed. A bridging loan takes an average of 2-4 weeks for the money to be in your account as a lump sum, which is considerably quicker than something like a mortgage.
Another big advantage to a bridging loan is that all credit scores are considered. Unlike a mortgage, your credit score isn’t a barrier to you borrowing money when you use a bridging loan.
Common reasons for bridging loans
Scenario 1: moving to a new house
One common use for a bridging loan is to the ‘bridge the financial gap’ between one property and another. When you’re moving house it’s not always possible to sell immediately and if you’ve found a property you love a bridging loan could give you the finances you need to secure the purchase of that property while you wait for your current property to sell.
For example, client A is looking to move home, they’re currently living in a property worth around £300,000 and are looking to downsize. They can’t sell their house straight away but they’ve found a property that’s perfect for them which is on the market for £200,000. They are waiting for their current their property to sell and need to use the equity in the property. They take out a bridging loan for £200,000 with an interest rate of 1% to purchase the new property. Their property sells three months later, and they can pay off their bridging loan in full. The bridging loan has cost them £6,000 in total interest and they have save themselves the hassle of taking out a mortgage which would have slowed them down causing them to miss out on the property they wanted. In a scenario like this, a bridging loan is a perfect option to secure the purchase of a property quickly without having already agreed a sale on a property you currently own.
Scenario 2: flipping a property
For anyone looking to purchase a property and renovate to resell, a bridging loan can be a quick and easy way to secure the funds you need to purchase and renovate the property./FlippingHousePrimaryResidence-Maskot-GettyImages-59caace1af5d3a00112dce99.jpg)
For example, client B is looking to refurbish a property which is on the market for £150,000 and then resell. The property needs £60,000 of refurbishments and it will take around 8 months to complete. He agrees in principle a bridging loan of £210,000 at an interest rate of 1% per month. With a bridging loan he becomes a cash buyer and is able to negotiate the property down to £125,000, so he now takes a bridging loan of £185,000. This loan will be enough to cover the purchase of the property and all the renovations he needs to do. Every month he will pay £1,850 in interest, so the loan will cost him £14,800 in total interest while he spends the 8 months renovating the property. Now that the house is renovated, he sells for £275,000. Now he can pay the loan back in full and he has still made a profit of £75,200 on the property.
Scenario 3: buying at auction
For those who are looking to purchase a property at auction a bridging loan can be a good option. When you buy a property at auction you are required to pay a 10% deposit on the day and sign a legally binding contract to pay the remaining 90% within a 28-day period.
Because of this 28-day window to purchase the property in full, a bridging loan can be the perfect way to quickly acquire the funds you need. Although a bridging loan is usually quick to acquire there are ways to speed it up. It is a good idea to get a loan in principle before you look to buy at auction. Being approved in principle by your lender means that the lender will provide you with a statement saying that they will lend a certain amount to you before you have purchased the property at auction. Not only will this speed up the process of getting your bridging loan, but it also means you have some peace of mind that you are likely to get your loan. Bridging loans should only ever be a short-term measure, so if you’re buying at auction you should have a clear exit strategy for how you intend to pay off your loan.
Scenario 4: construction finance
You can also use a bridging loan to fund a construction project, whether that be a property or otherwise. With Construction finance loans you can borrow up to £2 million towards a construction project of your choice.
For example, client C is looking to build a house to sell. They agree a bridging loan of £1.5 million at 0.7% interest to fund the project, which takes them a year to finish and then another month to sell. They borrow the money for a total of 13 months, meaning they will pay £10,500 every month for a total interest payment of £136,500. Once their project is complete, they sell for £2.5 million and pay off their loan in full. After their bridging loan has been paid off, they have made a profit of £863,500.
