How does a bridging loan work ?
Bridging loans are secured financial loans that fill (or “bridge”) the gap that occurs when you want to purchase a property before other funding is available. Since these loans are asset-based, you must own property, land or another asset of high value for loan approval. Many people use a bridging loan to buy a new home or commercial property after offering another property for sale. By examining all of their varied functions and benefits, you can gain a full understanding of, “What are bridging loans?”
Landlords and property developers use bridging loans frequently for funding property building and rental projects. However, this type of funding is growing increasingly popular among homeowners today since the timing of property chains is often difficult to predict. Some commercial bridging finance can be exempt from regulation. Yet personal bridging loans are all under regulation by the Financial Conduct Authority (FCA). These loans are most often ruled as mortgages, loans or consumer credit. Fewer owners of residential or business property today need to ask, “What are bridging loans?”
There are two different types of bridging loans, closed and open. If you apply and are approved for a closed bridge loan, you will have a fixed date for repayment. You will probably get a closed loan if you have exchanged contracts and are waiting for your home to sell. In an exchange of contracts sale, your attorney and the buyer’s attorney swap signed legal contracts. The property buyer pays a deposit to make the agreement binding.
When using an open bridge loan, no definite repayment date is set. However, you are usually required to repay your loan within one year. Whether you have an open or closed bridging loan, the lender will ask for a clear, sensible repayment plan. Your plan for repaying the loan may be getting a mortgage or repaying with equity received from a property sale. Most lenders also want firm evidence that you are purchasing a new home or other property and its price. They may also be interested in your back-up strategy for the loan repayment if the first plan should fail.
What can bridging loans be used for ?
A Bridge loan can be used as loans for various reasons related to residential or commercial property. The most common reasons for applying for this type of loan include buying land for building and purchasing a new home. Other major reasons are filling the gap in a broken property chain or buying a commercial building.
Many people today know that bridging finance is available. Yet they still ask lenders and members of the real estate industry, “What can I use bridging finance for?” Simply stated, you can seek approval for a bridging loan for a number of different reasons, such as the following:
- Buying a new house before your home sells to break the property chain
- Bridge loan for Funding a single or two storey house extension
- Starting a property development project eg building your own home
- Converting a commercial property into housing eg Pub into 2 x flats
- Building an office building or factory;
- Buying property as a rental investment;
- Finalising divorce settlements that involve property;
- Selling property to pay a tax debt.
Some homeowners and small business owners think that bridge financing can be used only by landlords, investors or property developers. Yet today, these short-term loans are also frequently used by individuals and businesses. More people now understand how this convenient type of funding can bridge time gaps in funding for real estate transactions.
If you are a UK resident who is 21 years of age or older, you can apply for a bridging loan. Your general personal financial status is not normally a factor in deciding your eligibility for funding. A bad credit report and CCJs do not usually prevent you from receiving bridge financing acceptance. This is due to the fact that these loans are asset-based. When you receive approval for this type of funding, it is based on the value of the property involved in your transaction.