Bridging finance is basically building a bridge between the date you need to pay for a house and when you receive the money for your mortgage.
It’s also often used as a short-term loan. Those who know a little something about short-term loans will know that they are often much more expensive. If it’s such an expensive loan, then why would you want to get one?
A ‘chain’ refers to the queue of hands that the buying process must travel through before you can buy a property. It might start with the buyer of your own property, then the bank, then you, the seller of the property you are buying, and probably a host of lawyers. Of course, that could be ad infinitum as the seller of the property you bought uses that money to buy a property they are interested in, and so forth. Sellers don’t often like being part of a chain because it means there are more variables to disrupt prompt payment, and breaking the chain could make your offer more attractive to them.
One of the primary functions of bridging loans is to allow those purchasing a property to pay for it before they have sold their own – therefore breaking the chain because you no longer rely on anyone else to pay for the property. Alternatively, a buyer might simply be waiting for a mortgage to process, but the property you want needs to be snatched up asap. You can bridge that gap in time with bridging finance. Once a seller has sold their property or obtained their mortgage, they can use that income to redeem the loan.
It can be risky to get a bridging loan when you haven’t had a mortgage approved yet. If the mortgage application should fall through, you will find it very difficult to get an application approved from a high street lender. The situation could prove extremely expensive if you end up having to continue payments for short-term finance. That’s why it’s essential you talk to a broker before you move forward with any short-term or bridging finance options.
If the property you are selling is in need of serious refurbishment, then you probably won’t get 100% of the mortgage amount. Lenders tend to retain some or all of the total loan amount if there is important work needed on your property. This is where bridging finance can come in handy. You can take a short-term loan out for the purpose of the refurbishment and, once your mortgage lender releases the funds, settle the short-term loan then.
The problem here is the time factor. Waiting for the refurbishment to be completed could put your offer on the new property in jeopardy, and the longer the refurbishment takes, the more expensive the loan is. Property developers and landlords may find this an attractive option when looking to refinance or if they simply need to complete work. There are options suitable for most situations, and to find one that’s bespoke to you, speak to a broker.
Buying at auction could be a great opportunity to get a great deal on a property. Repossessed houses, in particular, are usually being sold by banks who are not interested in making a profit, they’re just interested in getting their money back. That means there could be houses going for significantly under the market rate. However, it is more challenging for a buyer.
Having confidence that you can obtain funding is the worry of many buyers at auction. If you go through a broker, they may well be able to get an agreement in principle before or after the auction, which gives the seller more confidence in you. However, you’re often expected to complete the purchase around four weeks after the auction. Bridging finance can be used to help with financing until long-term funding has been secured.
Have these scenarios not answered your questions about bridging finance? Are you looking for short-term funding for an entirely different purpose? We’ll be glad to help out. Go to our contact us page; we look forward to hearing from you!