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It allows borrowers to borrow larger amounts of money than they would otherwise be able to via unsecured lending routes. With property prices in the UK generally on the rise and with properties worth hundreds of thousands of pounds, borrowers can apply to borrow anything from tens of thousands to potentially millions of pounds against their property's value, depending on the overall value of the property in question.

Bridging finance is a very popular route of ‘bridging the gap' between property purchases when short term finance is needed in order to secure a property prior to finalising of the sale of an initial property and subject to a different set of criteria than for other property loans (SPF Loans). These loans are fairly adaptable and can be borrowed against both residential and commercial property types.

Who are these Loans for?

Whilst bridging loans are for anyone that owns a property and has enough equity in the property to borrow against, typically these loans are taken out by homeowners to secure the purchase of a property before or during the interim period of selling their place of residence.

This type of finance is also often used by property developers and investors who need to quickly modernise or refurbish a property. In many cases, speed is crucial for property investors who need to secure and modernise properties as soon as possible in order to start seeing any return. Therefore, buy-to-let mortgages can be too lengthy a process, with bridging finance providing a logical solution. The benefit of investors doing things in this way is that they will have the money to purchase and modernise the property ahead of other potential buyers, giving them an advantage.

Additionally, these loans are ideal for property buyers who purchase at auction. Auction houses require the purchase of a property to be completed in 28 days, with a substantial deposit of 10% that needs to be available immediately in order to begin the process of purchasing the property. Bridging finance is available much quicker than a traditional mortgage which can take months to secure. Therefore, at auctions where time is very much of the essence, these loans are one of the only options.

What do Bridging Loans Require?

Whilst bridging loans are a great way to secure short term secured funding, including for paying off outstanding debts and for business-related purposes, there are different and sometimes stricter criteria for these loans compared to traditional and primary mortgages. The borrower will need to supply a range of documentation to the lender to prove financial viability and their ability to pay off the loan. Furthermore, borrowers need to demonstrate a viable ‘exit strategy.' This is the strategy with which they will be able to pay off and complete the repayment of the loan.

For example, the money to repay the bridging loan may come from the sale of a separate property or another high value asset. Alternatively and often in the case of property developers, the exit strategy is the quick refurbishment and sale of a property to be modernised.

Other Considerations

As well as the application considerations that should be accounted for, there are other considerations when it comes to properties and applying for bridging finance that should be considered. For example, property developers may need to get a SAP assessment (for energy efficiency) or sound testing certificate. This however, will only apply if the property is converted for example into multiple units or if any conversions or extensions meet the qualifying criteria for these tests (source: RJ Acoustics). It is very important to check prior to the completion of any works on the property.

Another consideration applies when looking to take out bridging finance as part of the auction process. Auction property purchases require the 10% deposit to be available on the day, to be paid to the auction house. Also the purchaser will need to cover potentially 25% or more of the property value themselves, as most loans will only cover a loan-to-value of up to 70-75%.

This means that in the example of a property purchased at auction for £500,000, the purchaser will need to have £50,000 available on the day. A bridging loan would cover up to £375,000, leaving the purchaser needing to cover the outstanding £75,000 themselves before the 28 day period elapses.