When you are short on funds but want, or need, to purchase a home right away, or need to complete property renovations, a bridging loan might be an excellent option for you instead of trying to get a conventional mortgage or another type of loan immediately for the home purchase or home renovations desired.
A bridging loan is a short term loan used to secure funding for your project until you can obtain a more permanent, long term traditional loan. Bridging loans are best used when you cannot get a conventional loan due to credit history, timing, and financial capabilities. Traditional loans take much longer to complete in comparison to bridging loans, so if time is of the essence, a bridging loan is the best option. Bridging loans often provide the cheapest route for securing immediate financing, are fast to arrange, have flexible lending criteria, and can be obtained on any real estate.
Landlords, homeowners and property developers most commonly use bridging loans as finance for auction purchases and house renovations.
Bridging Loans for Auction Purchases
One of the most popular uses of a bridging loan is for auction purchases. The quickness of obtaining financing for an auction purchase is of the utmost importance to outbid or bid first on an auction property. Typically, auction purchases need to be completed within 28 days. Because a bridging loan can be fully financed within a few days or up to a few weeks at most, they are the best option if a loan is needed to fund an auction purchase. Bridging loans for auction purchases are available for land, commercial and residential real estate.
A bridging loan for auction purchase can help you purchase a property and then also will allow you the time and finances to carry out any renovations and rehabilitations needed to the home before exiting the loan by refinancing into a long term traditional loan or selling the property for profit.
If you plan on using a bridging loan for auction purchase, it is advised to get the property valued and financing amount agreed upon before attending the auction. That way, if your bid is unsuccessful for the property, you only lose the cost of a valuation fee. If your bid is accepted and you are unable to obtain financing, you risk losing any deposit put down towards securing your winning bid. Some lenders do offer “no valuation bridging loans” for auction purchases, which would accelerate bidding on auction properties. However, these lenders may have higher rates as the risk would be higher on the loan.
Many auction properties are also unmortgageable properties, so a traditional or conventional mortgage for financing would not work for them. Using funding from a bridging loan for an auction purchase is an excellent idea because you can use the funds to complete the renovations needed to arrange for traditional financing or to sell the property to exit the bridging loan.
Examples of unmortgageable properties that traditional lenders will not finance are properties with structural issues, properties without functioning bathrooms or kitchens, properties valued under £50,000, or properties that are considered derelict. Bridging lenders are much more flexible in the criteria used for lending in comparison to traditional lenders, so if there is sufficient security or collateral available from the purchaser, a bridging loan might be a great option to secure the funding needed to purchase an unmortgageable property.
More often than not, when you are purchasing a home at an auction, it will either be unmortgageable at the time of purchase or in need of severe renovations. It is where the need for a bridging loan for house renovations comes in.
Bridging Loans for House Renovations
Getting a bridging loan for house renovations is a great way to get the funds needed for renovations quickly without having to worry about making payments on the loan while completing the renovations. It allows you to entirely focus on getting the renovations done and then will enable you to repay the loan once the renovations are completed.
Renovating a house is always a significant investment, but funding house renovations with traditional funding may not be an option if you have a poor credit history, not enough income, or cash on hand to help fund the renovations or payments on a traditional loan while working on the renovations.
Bridging loans allow you to start work immediately and help facilitate the work needed to convert a property to a mortgageable state where you can exit the bridging loan into a full-term traditional mortgage.
The types of renovations typically using a bridging loan can range from light refurbishments to heavy. These include everything from basement digs, barn conversions and also necessary renovations like kitchens and bathroom completions and additions.
If you’re considering a bridging loan for house renovations or a bridging loan for auction purchase, it’s essential first to have a builder, architect or contractor review the property to ensure the time frame the work can be completed in and the bridging loan amount needed to cover the cost.
Terms of a Bridging Loan
Bridging loans for house renovations also come with the option to “roll-up” the interest, so the final payment is made at the end of the loan term. It is also advantageous if you’re buying a new home because it enables you to use the loan entirely for the purchase of the new property. If you do roll-up the interest on the loan, it does mean that your total loan amount must then include the cost of interest, so you will have fewer funds available for the purchase of a house or house renovations that you’re using the loan to finance.
Bridging loans are secured primarily against the value of the property and allow you to borrow up to 70-75% Loan to Value of the property, sometimes 80% depending upon the lender. If you have multiple properties and can use them as collateral, you may be able to borrow more or at the very least, receive a lower interest rate on the loan.
Bridging loans also take into account the value of renovations and will base the amount approved upon the final cost of the home once renovations are completed. This is a great advantage to help finance renovations on a primary residence or auction purchase.
The Length of a Bridging Loan
As noted above, bridging loans are short-term loans. So that probably leaves you wondering, how long can you have a bridging loan for? The answer is dependent upon your exit plan. To get accepted for a bridging loan, you will need to have a clear exit plan laid out for the lender to review. The exit plan is the strategy you intend to use to repay the bridging loan at the end of its term and may either be the sale of a home or by securing long term traditional financing.
As a short-term loan, most bridging loan terms are about three months, with extensions being available if needed to achieve realistic property sales pricing or financing. The maximum duration for a bridging loan used to purchase residential property is twelve months, with the minimum term usually set at once month.
Most lenders also usually only charge interest for the actual duration of the loan, so that would mean no early repayment fees, which is another added benefit to a bridging loan.
Types of Bridging Loans
It is important to note on how long you can have a bridging loan for also depends on the type of bridge loan you obtain. There are closed bridge loans which are the most popular bridge loan and even open bridge loans. A closed bridge loan will have a predetermined ending date to the loan where the loan must be paid in full. A closed bridge loan will have a lower interested rate than an open bridge loan, but the financial penalties of breaking the terms of a closed bridge loan are much more severe than that of an open bridge loan.
An open bridge loan is one that has no fixed pay-off date and often comes with a much higher interest rate than a closed bridge loan. Sometimes a lender will also deduct the loan interest from the loan advance to ensure the security of the loan. An open bridge loan is a good option if you are uncertain about securing long term financing when the loan ends if you how credit repairs needed, or if you are unsure about a sales date or price of a home you’re selling as your exit strategy. Because they are riskier than a closed bridge loan, open bridge loans are less commonly sought out.
In summary, a bridging loan is the most popular form of loan chosen for auction purchases and renovations when the funds are not immediately available on hand. They are the most desired due to the quickness with which it can be secured and the ease with which it can be obtained.