Bridging finance is a comparatively straightforward financial product. Issued as a strictly short-term facility, bridging loans offer a flexible and cost-effective alternative to conventional loans and mortgage.
But as is often the case, it is not until you see a bridging loan put to use in a practical context that the potential benefits of the facility become clear. In order to clarify any confusion as to how a bridging loan works, here is a brief example of how a bridging loan can be put to use:
Bridging finance for a property purchase, refurbishment and sale
An established property investor comes across a mixed-use building for sale at a low price, due to the extent of the renovation work needed. The property is put up for sale at auction, where the investor places a successful bid of £800,000.
During the bridging finance application process, the lender conducts a valuation on the property, which determines its actual market value as closer to £1 million. Consequently, a bridging loan is offered at 80% LTV based on its actual market value, providing the borrower with 100% of the £800,000 needed to purchase the property.
Having already received a decision in principle on a bridging loan, the buyer is able to access the funds needed to pay for the property in full before the four-week deadline.
Over the course of the next six months, the property is renovated and refurbished to a considerably higher standard. Upon completion of the project, the market value of the development has increased to around £1.5 million.
The development is sold for its full market value, the bridging loan is repaid (plus rolled-up monthly interest) and the remaining profits are retained by the developer.
By making use of affordable bridging finance, the investor has made a significant profit over the course of just six months by purchasing and renovating a property no conventional bank would be willing to lend against.
Common Questions about Bridging Loans
- What is a bridging loan and how does it work?
Bridging finance is a short-term facility for time-critical property purchases, investments and outgoings. A bridging loan can often be accessed within a matter of days, and is typically repaid six to 12 months later.
- Who can qualify for a bridging loan?
Eligibility is determined primarily on the basis of the availability of assets to secure the loan, along when the applicant’s exit strategy – i.e. how they intend to repay the loan.
- How much money can I borrow?
Some lenders set limitations on minimum and maximum loan amounts – often from £100,000 to more than £10 million. Elsewhere, there are no upper limits to how much can be borrowed, if sufficient equity is provided to secure the loan.
- How much does a bridging loan cost?
Monthly interest rates can be as low as 0.5% or less – seek broker support before applying to ensure you get the best possible deal.
- What is the main advantage of bridging finance?
Whereas a typical mortgage or property loan can take several months to arrange, a bridging loan can be organised and accessed within a matter of days.
To learn more about bridging products available to you, please check out the types available from bridgingloans.co.uk.
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