What is a Bridging Loan and How Does it Work?
A bridging loan is a short term loan designed to allow a borrower to raise money on an asset or assets ahead of a pre-determined event that will repay the loan – this is normally referred to as the exit. Examples of common scenarios include; a homeowner wishing to purchase a new property ahead of the sale of their existing residence or enabling a property investor to buy a dilapidated property quickly before refurbishing it and selling for a profit.
Loans are also available for business purposes, such as a cash injection or to settle a tax bill. In all instances it will be crucial to demonstrate a plausible repayment strategy by the end of the loan term i.e. sale of property or assets, a liquidity event such as sale of a business or bonus payment. These loans are suitable for property owners across the board including homeowners, developers and property investors.
Example 1 – A homeowner who is selling their primary property to fund the purchase of a new property may take out bridging finance. If the homeowner hasn’t secured a buyer for their current property or if their current property’s sale is going through but will not be completed in time for them to complete on the second property, a bridging loan fills the void until they have sold the first property.
A bridging loan can be arranged across both properties even if the existing property already has a mortgage secured upon it, this will only be possible where there is sufficient equity within the two properties. Upon the sale of the first property, the property owner will pay off the bridging loan with any residual mortgage borrowing arranged by way of a traditional term loan mortgage.
Example 2 – A property developer has identified a property in need of modernisation; the speed in which they need to move to secure the property as well as its condition means that traditional Buy-to-Let mortgage finance is not viable. A refurbishment bridging loan is arranged based upon the assessed value of the property. This loan is arranged quickly which enables the property developer to purchase the property ahead of other interested purchasers. They then refurbish the property before either selling it to realise their profit or refinancing the bridging loan onto a Buy-to-Let mortgage and letting the property.