Bridging loans are increasingly being used in the UK to fund both property and business-related transactions. While residential mortgages are commonplace and widely understood, there is still some uncertainty surrounding bridging loans, particularly when it comes to property transactions. This article will explain how they work and when to use them.
What is a Bridging Loan?
A bridging loan is a form of short-term finance that is generally used to bridge the gap between a present expense and a future cash flow. Bridging loans are commonly used to provide liquidity to borrowers based on the occurrence of a future event. Bridging loans have been around for a long time, but have recently become a popular form of finance, with hundreds of new lenders in the market, each offering their own bridging products with unique criteria. Bridging loans can be characterised by a number of different factors.
Firstly, bridging loans have shorter terms than traditional finance, often only lasting a few months. Where traditional finance can have terms of 20-30 years, bridging finance generally lasts between 3 and 24 months, although some lenders offer shorter/longer terms. Given these short terms, bridging loans often come at a premium to traditional finance. Where traditional finance generally has lower, more competitive interest rates, bridging loans often have higher rates (between 1.00% and 2.00% per month).
The primary reason for the higher rates is due to the higher risk to lenders. Secondly, bridging finance can be arranged in a much shorter timeframe than other forms of traditional finance. Where traditional business or mortgage finance can take months to arrange, bridging loans can often be arranged in a few weeks, even days. One of the primary reasons for this is the fact that the repayment of a bridging loan is based on the occurrence of a future event.
With this in mind, when an event has a high degree of certainty, and lenders are confident that it will occur, they are able to act quickly. Another important factor to understand when considering a bridging loan is the repayment of the bridging loans UK. Generally, bridging loans will be repaid in one bullet payment at the end of their term as opposed to regular recurring payments throughout the lifetime of the loan. In fact, bridging lenders generally give borrowers the option to roll up the interest charges, meaning they are repaid along with the capital at the end of the loan, rather than serviced regularly throughout the lifespan of the loan.
Why Do Property Investors Use Bridging Loans
As previously mentioned, there are a number of different applications for bridging loans, from inheritances to share sales, but by far the most common application for bridging loans is for property transactions. Given the illiquid nature of real estate assets, real estate investors use bridging loans as a way of accessing liquidity on an otherwise illiquid asset. One of the main ways in which they do this is by using a bridging loan to purchase a new property, prior to the sale of an existing one.
By securing a bridging loan against their existing property, they are afforded the funds needed to take advantage of an opportunity within the property market. Once the new property has been purchased and the old property has been sold, the borrower will repay the lender with the proceeds of the sale from the old property. While bridging loans are still relatively new, when compared to traditional mortgage finance, they have become extremely popular in recent years.
While there are a number of reasons for this, perhaps the most important is the fact that they provide borrowers the ability to move quickly and act on opportunities without delay, enabling them to move quickly in a highly competitive property market. In addition to the above, property bridging loans are often offered to international borrowers, as they rely heavily on the security property and the planned exit and less on the borrower’s ability to repay the loan with onshore income. With this in mind, London’s property market is the perfect landscape for bridging loan lenders. With a high number of international property investors and a fast moving market, London is home to a number of bridging loan lenders and brokers.
In conclusion, bridging loans, and specifically, property bridging loans can be an important tool for investors who need fast access to finance. While traditional forms of finance can provide a cheaper alternative, they often take a long time to arrange and have strict criteria. Bridging loans on the other hand, provide borrowers with a fast and flexible alternative to traditional finance, making them an increasingly popular choice for property developers and investors, especially in London, where the market moves quickly, and investors are expected to do the same.