What is a Bridging Loan?
What is a bridging loan? In the simplest terms it is a short-term facility to provide capital. It’s used in situations where there is a time lag between the purchase of one asset and the sale of another. Bridging loans enable the borrower to buy before they can sell. This is especially useful in the property market, where chains and auctions can mean promising opportunities are time sensitive.
Usually, bridging loans are used when the borrower wants to secure a new property, but they have not yet sold their existing property. Most vendors will not accept an offer without proof of funds. So, if the existing property is still on the market, you are unlikely to have the necessary liquidity to make an acceptable offer. In short, you may miss out on a great opportunity just because of a short delay in the timing of your asset sale.
Bridging loans are also useful when purchasing property at auction. Completion deadlines are usually short, and the property purchased may not be suitable as security. Bridging finance can be very useful to short-term development projects too, where a property is only likely to remain in the name of the developer for a short period.View Services
How does a bridging loan work?
A bridging loan is essentially a transaction, where your existing asset is used as security for the bridging loan. This is possible even if your asset is held under legal charge (mortgaged) by another lender, providing enough equity is available. Put simply, that’s the value of the asset minus the existing loan. If the equity is inadequate, the provider of the bridging loan will also take a legal charge over the asset being acquired.
Once the new asset is acquired, you will be the owner of both assets, but you will also be responsible for servicing any debt attached to them. This may mean paying two or more mortgages. With that in mind, it’s vital that you have a short-term exit strategy, such as:
- The sale of the first asset.
- The renting out of a previously marketed unsold property.
- The conversion of the bridging facility to a more traditional repayment mortgage.