What is bridging finance and how can it help you pursue your property ambitions? Mortgage advisor Anthony Wright, who is also the latest Ask the Expert columnist to join what MORTGAGE, kicks off a new series of features with his introduction to bridging
In the dynamic world of real estate and business, timing is often everything. Whether you’re purchasing a new property, renovating an existing one or seizing a time-sensitive business opportunity, having access to quick and flexible funding can make all the difference.
This is where bridging finance comes into play. Bridging finance, also known as a bridging loan, is a short-term financing solution designed to ‘bridge’ the gap between immediate financial needs and longer-term funding arrangements.
In this article, we’ll explore the fundamentals of bridging finance, its uses, benefits and key considerations.
What is bridging finance?
Bridging finance is a type of short-term loan that provides immediate access to capital, typically for a period of a few months to up to two years. It is often used to cover temporary cash flow shortages or to finance a purchase before securing permanent funding.
Unlike traditional loans, which are repaid over several years, bridging loans are designed to be repaid quickly, often through the sale of an asset or the refinancing of a property.
Bridging finance is commonly used in real estate transactions, but it can also be applied in other scenarios, such as business acquisitions, auction purchases or even personal financial needs.
The loan is secured against an asset, usually property, which serves as collateral. This security allows lenders to offer bridging finance with relatively fast approval times, often within days.
How does bridging finance work?
The mechanics of bridging finance are relatively straightforward. A borrower applies for a loan to cover a specific short-term need, such as purchasing a new property before selling an existing one.
The lender assesses the value of the collateral (for example, the property) and the borrower’s ability to repay the loan. Once approved, the funds are disbursed quickly, allowing the borrower to proceed with their plans.
Repayment is usually achieved through one of two methods:
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Closed bridging loan
The borrower has a clear exit strategy, such as the sale of a property, and a specific repayment date in mind. This type of loan often comes with lower interest rates due to the reduced risk for the lender.
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Open bridging loan
The borrower does not have a fixed repayment date, making it more flexible but also riskier for the lender. As a result, interest rates may be higher.
Common uses of bridging finance
Bridging finance is a versatile tool that can be used in a variety of situations. Some of the most common applications include:
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Property purchases
Bridging loans are frequently used in real estate to purchase a new property before selling an existing one. This is particularly useful in competitive markets where delays in selling could result in missing out on a desirable property.
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Property development
Developers often use bridging finance to fund renovations, conversions, or new builds. The loan can cover costs until the project is completed and sold or refinanced.
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Auction purchases
Properties sold at auction often require immediate payment, leaving little time to arrange traditional financing. Bridging finance provides the necessary funds quickly, allowing buyers to secure the property.
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Business opportunities
Bridging loans can be used to seize time-sensitive business opportunities, such as acquiring a competitor or purchasing inventory at a discount.
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Chain breaks
In property transactions, a “chain break” occurs when one party in the chain cannot complete their purchase, causing delays for everyone involved. Bridging finance can be used to keep the transaction on track.
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Debt consolidation
In some cases, bridging finance can be used to consolidate high-interest debts into a single, more manageable loan.
Benefits of bridging finance
Bridging finance offers several advantages, making it an attractive option for borrowers with short-term funding needs:
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Speed
One of the biggest benefits of bridging finance is the speed at which funds can be accessed. Approval and disbursement can often be completed within days, compared to weeks or months for traditional loans.
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Flexibility
Bridging loans can be tailored to suit a wide range of needs, from property purchases to business investments. The terms and repayment options can be customized to fit the borrower’s specific circumstances.
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No Monthly repayments (interest-only)
With interest-only payments, borrowers can manage their cash flow more effectively during the loan term.
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Access to larger amounts
Because bridging loans are secured against collateral, lenders are often willing to provide larger loan amounts than unsecured financing options.
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Helps secure opportunities
Bridging finance enables borrowers to act quickly, whether it’s purchasing a property at auction or seizing a business opportunity.
Key considerations before taking out bridging finance
While bridging finance offers many benefits, it’s important to approach it with caution. Here are some key considerations:
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Higher interest rates
Bridging loans typically have higher interest rates than traditional loans due to their short-term nature and higher risk.
They start at 0.75% per month, but the payments are ‘retained interest or rolled’ and paid up at the end. Though they can be serviced as a mortgage.
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Exit strategy
Borrowers must have a clear and realistic exit strategy to repay the loan. This is usually from a refinance of the property at the higher value onto a ‘term mortgage’, or sale of the property. Failure to do so could result in financial difficulties or the loss of the collateral.
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Fees and costs
In addition to interest, bridging loans may come with broker fees, arrangement fees (usually 2%) legal fees (£1,500 + VAT), and other charges. It’s essential to factor these into the overall cost.
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Risk of losing collateral
Since bridging loans are secured against assets, borrowers risk losing their collateral if they cannot repay the loan.
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Short-term solution
Bridging finance is not a long-term funding solution. It should only be used when there is a clear plan for repayment.
An overview of bridging finance
Bridging finance is a powerful tool for individuals and businesses facing short-term financial gaps. Its speed, flexibility, and accessibility make it an ideal solution for a wide range of scenarios, from property purchases to business investments.
However, it’s crucial to approach bridging finance with a clear understanding of the costs, risks, and repayment requirements.
By doing so, borrowers can leverage this financing option to achieve their goals and seize opportunities with confidence.
Whether you’re a property developer, investor, or business owner, bridging finance could be the key to unlocking your next big move.
Meet our expert…
Anthony Wright is a specialist development broker at Always Wright Mortgages Limited and every day he helps clients to obtain the best mortgages to finance their dream home, second home or buy-to-let portfolio.
With four years’ experience in mortgages working with the UK’s top banks and being multi-award winning broker he is ideally skilled to answer YOUR questions. If you have a query about any aspect of your mortgage send us a message in the comments below or email kate.saines@emap.com
