Bridging finance can be much quicker to arrange than a normal mortgage

Bridging finance (also known as Short Term Lending) is a solution that can be used to provide fast access to funding for a number of different circumstances.

Often, bridging finance can be much quicker to arrange than a normal mortgage. However, bridging finance should not be considered a replacement for more traditional mortgage lending which is normally more cost-efficient.  It can be a complicated process and each case is written on a bespoke basis according to the requirements of each individual transaction.

Initially, this type of finance was used as a way to mend a broken link in a housing chain and typically used to ‘bridge’ the gap between a house sale and completion.

However, bridging is often also used for people buying at auction, to meet strict deadlines (usually of 28 days), for people wanting to carry out refurbishments to boost the value of their homes or where the property would not met the requirements of a traditional mortgage lender as well as for numerous business purposes. Some lenders will also help with short term VAT requirements subject to strict controls.

In more recent years, the market has seen a broader number of uses for short-term loans as their popularity has increased. For example, many commercial premises are now being converted into residential houses or flats, because of the expansion of permitted development rights, and bridging loans can be used in the initial stages of the conversion with longer term funding provided once the building project has started.  Short-term finance can be used to buy new equipment, to build up stocks ahead of an expected rush on seasonal orders, or for buying shares in another business.  It’s becoming increasingly popular, mainly because of its speed and flexibility.

The best way to look at this is as a means to an end.  Lenders will need certainty on the exit route (how will they get their money back?) and they will always insist on an agreement being in place from a traditional mortgage lender to provide a mortgage, at a given time and once any requirements have been fulfilled.  Alternatively, the exit route might be from the sale of the same or another property. So, short term lending is designed to fulfil the need or desire to act quickly.

Finally, this type of funding has become more competitive over the years with some now offering rates as low as 0.43% per month for the right customer.  Obviously, individual terms and conditions apply and with these types of offerings always seek professional advice!

Buying at Auction, with short term finance

Auction purchases can be a great way of buying properties at a discount and potentially achieving quick equity growth. Typically, a property will be listed via an auction because it may be uninhabitable (think no kitchen or bathroom) or it may be that the vendors need to realise sale funds quickly and are prepared to sell the property at below market value. Buyers typically exchange contracts and pay their deposit at the auction with a requirement to complete within 3-4 weeks. The condition of the property, and the timescales required, often rule out using an ordinary mortgage.

A recent example from one of our lenders, United Trust Bank, revolved around two brothers.  They had received a cash inheritance and had decided to use it to launch careers in property investment. Both were tradesmen and having completed many refurbishments for clients, they were keen to find a property they could refurbish themselves and sell on for a profit.

They visited several auctions to gain an understanding of the process and after some solid research on a particular area, decided to bid for a semi-detached house that had been left empty for a number of years and fallen into minor disrepair. They first went through the legal pack and confirmed there were no serious underlying issues with the property. Then, after running the bridging finance numbers ahead of the auction, they successfully secured the house and paid their 10% deposit with some of their inheritance.

The auction house required the sale to be completed within 4 weeks and after a quick valuation, the brothers were able to draw the bridging facility to complete the purchase well before the deadline. The brothers had the funds to complete the intended refurbishment works.

Although light in nature, the improvement works were designed to bring the property up to an excellent standard. The works were completed quickly and within budget.

The short term bridging finance enabled the brothers to acquire an uninhabitable property within a tight deadline. In addition, the typical 12 month term, gave them time to complete the works and properly market the property to achieve their desired selling price and a successful start to their property investment career.

Such an example is not unusual and is one that can be reviewed by a number of specialist lenders.  But as always, seek professional advice and review all options available to you.

Why use Short Term Finance / Bridging Loans?

Short term finance (Bridging) was initially used as a way to mend a broken link in a housing chain and typically used to ‘bridge’ the gap between a house sale and completion.

However, bridging is often also used for people buying at auction, to meet strict deadlines - usually of 28 days - for people wanting to carry out refurbishments to boost the value of their homes or for numerous business purposes. Some lenders will also help with short term VAT requirements subject to strict controls.

In more recent years, the market has seen a broader number of uses for short-term loans as their popularity has increased. For example, many commercial premises are now being converted into residential houses or flats, because of the expansion of permitted development rights, and bridging loans can be used in the initial stages of the conversion with longer term funding provided once the building project has started.  Short-term finance can be used to buy new equipment, to build up stocks ahead of an expected rush on seasonal orders, or for buying shares in another business.  It’s becoming increasingly popular, mainly because of its speed and flexibility.

For example, a couple may own a £300,000 house with an outstanding mortgage of £150,000. They may have seen their dream home for £500,000 but the vendor will only sell on condition that they exchange contracts within three weeks and complete in four.  It may be difficult to get the finance from a bank or building society to buy the house in such a tight time frame, so they can take out a short-term loan, which is regulated by the Financial Conduct Authority (FCA) as a stop-gap.  Short-term loans are typically for 12 months and the borrower pays monthly interest, which can be “rolled up” and deferred until the loan ends. However, the loan can usually be paid off before the loan ends. In this case, it could be when the couple sell their previous house.  

Alternatively it might be used for a commercial property acquisition.  An investor may want to buy additional units on a business park. However, the seller will cut the price of the sale if the investor can pay within three weeks. His bank may be unable to provide the money needed in such a short timescale, so he will be able to take out a bridging loan to cover the purchase cost, secured against the other units already owned on the business park. Lenders could provide the loan ahead of the deadline, giving the investor time for his bank to release the funds to pay back the loan.

Whatever the scenario, short term finance can be used for a wide variety of opportunities and as always, seek professional advice.