How to guide – bridging loans;
5 ways to profit by using a bridging loan
A bridging loan or bridging finance is a short term property loan, typically for between 1 month and 18 months (although longer and shorter terms are possible) used to “bridge the gap” between the finance need (purchase or other requirement) and the exit (normally a sale or refinance onto a term product).
Put simply it’s possible to raise funds quickly for property or business purposes by using a bridging loan. The lender will want security (the property) and a viable exit route (sale/refinance).
So – we all know that bridging will cost more than a term mortgage, so what’s the point of using a bridging loan instead of a term loan?
A bridging loan can be arranged in hours, if your acorn.finance broker has sufficient information for a lender to approve the case we can have an offer back the same day or next day. If we have a valid valuation report then the offer can go straight to solicitors and completion could easily be within a week, possibly a couple of days.
This is achieved by a much simpler application process and streamlined legal and property searches.
Why does this matter?
- Being able to complete a purchase quickly might allow better negotiation of purchase price with a “committed” seller.
- An auction purchase should be below market value but relies on a fast completion, typically within 28 days.
- Short term cash-flow problems in the applicant’s business.
- Taking advantage of a short term opportunity.
2- Renovating, restoring or converting property
Where a property is in an un-mortgagable condition then a bridging loan is often the best way to make the purchase and renovate before transferring onto a long term mortgage or selling.
Using a briding loan makes the purchase faster, the legal and arrangement costs are reduced as there is often a faster process to completion, all of which helps you to increase your profit using a bridging loan.
3- Churning property – “flipping”
Where there is no intention of keeping the property then the minimal exit fees offered by a bridging loan (with some products there will be no exit fees at all) mean that a bridging loan will be significantly cheaper than a term loan – another way of improving your profit with a bridging loan.
A long term loan will typically need proof of income in order to service the loan, this can be very difficult in the case of property developers or renovators whose income comes irregularly as sales are completed. A bridging loan would normally have no payments to be made, with the interest rolled into the loan or deducted from the advance, meaning that affordability does not need to be proved.
This can also help when buying business premises where the business has closed down and needs to be re-established. Many of the key business lenders would need a minimum of 12 months trading before they would consider a long term mortgage.
5- Credit repair
Where a client is looking to purchase investment or business property but a credit problem is making the application impossible a short term bridge might be sufficient to clear the problem, repaying a bad debt or giving clear space between the problem and the mortgage application.
To find out more about the uses and value of bridging finance click here.
Our recent bridging finance successes have included;
- A bridging loan for credit repair in North Yorkshire.
- A refinance onto a bridging loan to grow a property portfolio, also in Yorkshire.
- A briding loan to purchase a closed pub in Cornwall.
- Bridging finance for conversion of a commercial property to flats in Merseyside.