What is bridging finance, and how does it work?

What is bridging finance?

If you’re in the market for a new home but find yourself strapped for cash, or if you’re in business and you find an outstanding deal but need to secure it before anyone else does, you could be eligible for bridging finance. What is bridging finance and how does work?

bridging finance work

What is bridging finance?

Also referred to as bridging loans, bridging finance involves securing a short-term loan without having to go through the rigmarole of a credit check by a bank or licensed lender. Instead, bridging finance is secured with an asset of similar or equal value to the amount you’re planning to borrow.

Under most circumstances, these are used to finance the purchase of the new property. For instance, bridging loans can help buy a house or a piece of undeveloped land while the borrower awaits the sale of their current home or an industrial asset.

In the UK and territories within the Commonwealth, those who take out bridging finance are given six to twelve months to completely pay the loan. The six-month period usually applies to those who are selling their property. On the other hand, those who take out the loan to construct a new structure can apply for up to a year.

If you’re interested in applying for a bridging loan, you can get in touch with https://www.bridgingfinanceloans.co.uk/

How does bridging finance work?

Keep in mind that there are two forms of bridging finance: closed and open. The form is dependent on whether or not a borrower has a fixed date for repayment.

Closed bridging finance

Closed bridging loans have a fixed repayment date. These normally apply to transactions where the borrower has already exchanged contracts for a property but is awaiting the proceeds from the final sale.

Open bridging finance

While open bridging loans don’t technically have a scheduled date of repayment, it is generally understood that the borrower needs to pay it off within a year of approval.

Either way, lenders expect borrowers to present a clear exit plan or repayment strategy when they apply for a bridging loan. In most cases, this may involve taking out a mortgage or using equity from a previous sale of the property.

Lenders will also require proof that the new property actually exists. They will also need the price a borrower expects to pay for it and proof that they are in the process of selling off an existing property. In some cases, borrowers also need to have a backup plan in place if they run into issues with their current exit plan.

How much can you borrow under the terms of bridging finance?

Technically, a borrower is only allowed to get up to around 75 per cent of the total value of their property, a value referred to as the maximum loan to value (LTV) ratio.

I can’t sell my home/property; what alternatives do I have?

If bridging finance is not an option in your current circumstances, you may want to consider a let-to-buy mortgage. This is usually done by refinancing your current home while using any equity released to purchase or build a new house.