When would you use bridging loans?
Bridging loans are a short-term funding solution that helps to bridge a gap between a debt that’s due and other lines of credit then becoming available. But when exactly would such circumstances arise, making the option of applying for a bridging loan worth considering? We take a look at the situations in which you would use a bridging loan to help with finances.
Who are bridging loans aimed at?
When it comes to bridging loans they are typically used to help someone to complete the purchase of a house before selling their current home, giving them short-term access to funding. For this reason, bridging loans tend to be aimed at property developers, and landlords, as well as those who are intending to buy a property at auction. Furthermore, bridging loans may also be used by asset-rich borrowers who need to lend money for a residential property.
Bridging loan categories
When it comes to the type of bridging loan you may decide to use, there are two categories, each having important differences. You should be fully aware as to how the two work as it will affect not only the rates that you will receive but also the amount you will get from a lender and the duration of the loan itself. Bridging loan lenders will be assessing your suitability for the loan based on the reasons why you have decided to apply for this type of funding.
Open bridging loans
This type of loan is when a loan contract has been agreed upon but an exact date when repayments will start to be made have not been established, this is why it is also called an ‘open-end’ bridging loan. Most bridging loans that are given by lenders fall under this category, and whilst an exact repayment date isn’t necessarily given, there is usually a cut-off point in which the entirety of the loan needs to be paid in full.
Closed bridging loans
Essentially, a closed bridging loan works in a completely different way to the open-ended variety, as from the outset there has been an exit date agreed between the lender and the borrower as to when repayments will be made. Generally speaking, lenders tend to prefer this category of the loan and therefore more likely to agree to a loan of this kind, as this type of bridging loan gives the provider confidence that repayments will be made and without delay.
Whilst this option is not as common, it can be great for those who are owners who intend to sell the property but need to refurbish the building first, as in this position, you are likely to have a timeframe in which to both complete refurbishments and complete the sale. Furthermore, for those who have already exchanged on selling a house and are waiting for the completion date to be finalised, closed bridging loans can be a preferred option.
The advantages of using bridging loans
Using a bridging loan for the property sector has a number of advantages, such as:
- If the property you are buying isn’t mortgageable due to the building being run-down, bridging loans can be a great option for you if you are intending to refurbish the place but need to find funding in order to be able to do so, so that you can then sell the property at a later date
- The process is far quicker when it comes to bridging loans than it is compared to trying to sort out remortgaging or sorting out a second mortgage application. It can sometimes take just a matter of days in order for money to be approved, compared to months of waiting with other types of funding. This is particularly helpful given that the entire point of bridging loans is that they are able to bridge a short gap of time whilst capital is being raised
- The flexibility of bridging loans is another plus point, as you can decide to draw the loan in stages, or you can choose to pay the loan on or by a certain date
- The reasons for applying and being accepted for a bridging loan tend to be far more varied than other kinds of loans available. This is is in part due to the fact that lenders are expecting you to pay the loan back imminently on the date that has been agreed upon
- The income that you have is far less important when it comes to approving your bridging loan application. Lenders will be focusing on the fact that the outstanding balance will be settled through the sale of a property or refinancing instead as opposed to how much you earn
- Another bonus of bridging loans is that you do not need to be a homeowner in order to be able to receive one. Bridging loans are secured against a valuable asset
Are bridging loans regulated?
As stated by the Financial Conduct Authority (FCA) it comes down to the category of the bridging loan. If it is a personal bridging loan, these are regulated by the FCA, however, this isn’t always the case with certain business bridging loans which are exempt. Nevertheless, if they are part of the Association of Short Term Lenders (ASTL) they will need to ensure that they abide by the Code of Conduct and the Value Charter, regardless of whether or not they are regulated by the FCA.
When it comes to the category of non-regulated bridging loans, this is usually for the following types of finance:
- Mixed-use properties (such as properties that are a mixture of commercial and residential i.e. a restaurant that has a flat above it)
- People who have limited companies
- Buy-to-let properties
- Investment properties