A solution for investors seeking quick and flexible funding
In the rapid-paced property market, timing can be the key difference between securing an investment property and missing out. For investors needing quick and flexible funding, bridging finance offers a dependable solution. Also known as a bridging loan, it is a short-term funding option designed to ‘bridge’ a temporary gap until a longer-term financial arrangement is in place or an asset is sold.
This form of finance provides immediate access to capital, with loan durations typically ranging from a few months to two years. Unlike a traditional mortgage that is repaid over an extended period, a bridging loan is intended to be settled swiftly, making it an essential tool for seizing time-sensitive opportunities.
Understanding the mechanics
The process of securing bridging finance is relatively straightforward. The loan is secured against a high-value asset, most commonly property, which acts as collateral for the lender. This security reduces the lender’s risk and allows for much faster approval times than high-street banks, often releasing funds within a matter of days.
When you apply, the lender evaluates the value of your collateral and your proposed repayment plan, often called the ‘exit strategy’. Repayment typically occurs in one of two ways. A ‘closed bridge’ is used when there is a definite plan and date for repayment, such as a mutually agreed property sale. An ‘open bridge’ provides more flexibility when the repayment date isn’t fixed, although this can sometimes result in a higher interest rate.
Common applications for bridging finance
Bridging loans are highly adaptable. Property developers and investors frequently utilise bridging finance to fund renovation or conversion projects, covering costs until the property is sold or refinanced with a standard buy-to-let mortgage.
Furthermore, these loans can save a property chain if a link breaks or provide capital for urgent business opportunities, such as acquiring a competitor or buying stock at a discounted price. In some cases, they can even be used to consolidate high-interest debts into a single manageable short-term loan.
Borrower’s unique circumstances
Where a standard mortgage application can take weeks or even months, bridging loan applications can be approved and funds disbursed in days. This agility enables buyers to act decisively and secure opportunities they might otherwise miss.
This financing is also very flexible, with terms that can be customised to a borrower’s specific situation. Many products provide ‘interest-only’ or ‘retained interest’ options, where monthly payments are not necessary and the interest is ‘rolled up’ and paid in full along with the capital when the loan is repaid. Because the loan is secured against property, lenders are often willing to offer larger sums than would be available through unsecured lending.
Key points to consider
While bridging finance is a useful tool, it involves important considerations. Interest rates are higher than for traditional mortgages, often starting from around 0.75% per month, reflecting the short-term, higher-risk nature of the lending. A clear and viable exit strategy is essential, as failure to repay the loan on time could jeopardise your collateral.
You must also consider additional costs. These may include broker fees, arrangement fees which are usually around 2% of the loan amount, and legal fees, which could be approximately £1,500 + VAT. Remember that bridging finance is a short-term option and should only be used when you have a clear repayment plan within the agreed-upon period.
Is bridging finance right for you?
Bridging finance can be the key to unlocking your next property venture or business goal, providing the speed and flexibility needed to act quickly. However, it is vital to approach it with a full understanding of the costs, risks, and repayment obligations involved.
By carefully weighing the benefits against the considerations, borrowers can confidently use this specialised finance to their advantage.
