There are many reasons why people use bridging loans. Whether it be to purchase a residential property, refurbish an asset bought at auction or even invest in commercial property. There are now a variety of products on the market. They cover a whole host of scenarios that might arise from brokers.
Knowing what is available on the market for brokers is key. Yet, as the industry climate continues to change, it can be difficult for brokers to keep track of existing loans on the market. Clarity has never been more important. Not only to monitor what’s available. But to clearly understand how each loan can help their clients.
Back in 2008, the financial crash became the catalyst for bridging finance. It created stability and encouraged many seeking fast financial funding to buy. Especially in the years that followed, when high street bank criteria, tighten. Bridging loans are generated on a case-by-case basis, tailored to client’s specific needs. Establishing a bespoke experience.
The parallel between then and now has not gone unmissed. Much like before, bridging has become a stable as demand as property remains strong, despite the uneasiness in the air. But when is the best time for borrowers to be looking to bridging? We’ve collected the top 5 reasons why our clients come to us:
1. Delays caused by long-term lenders
The main reason why people uses bridging loans, is because they’re fast. Traditional lending is a long process. In many cases, it can take up to 130 days! Even for a simple application. With such a large time span waiting for funds, it can put the borrower at risk of a deal collapsing.
Unless you’re a first-time buyer, property chains are pretty much are an unavoidable situation. A smooth transition relies on all buyers involved to have:
- Finance at the ready
- Solicitors up to date
- Paperwork in order
You’ll know that this rarely goes to plan. This amounts to pressure on all members up and down the chain, all pushing to sell as quickly as possible to keep the movement flowing. Sometimes this is at best difficult, and at worst just down-right impossible.
This is where a bridging loan comes in. Being able to purchase a property before your sale, eases the pressure off yourself. With a bespoke bridging loan, you can complete in under 2 weeks. Therefore, if you encounter delays, the bridging finance allows you to ‘bridge’ the gap in the timeline.
This way, you’re still able to continue with your property purchase, but without the worry of funds being unavailable. Once the traditional lending comes through, you can use this an exit strategy and repay back the bridging loan.
2. All for auctions
Buying a property at auction is a great place to look for cheaper properties, whether it be resident or commercial. Auctions are popular for those looking to work on refurbishment projects, so that you can redecorate, refurbish then resell for a higher profit.
When you buy at auction, you will given a time period in which you’ll need to complete. From exchanging at the auction, this is usually 28 days. However, always make sure you check the period in advance, as it can longer or shorter.
As mainstream finance can take months to arrange, it isn’t the best solution when purchasing from an auction house. This limited time scale is why bridging auction finance is a great form of finance to use. Completing before the deadline will ensure that you won’t lose your asset or your deposit. It is always best to arrange your auction finance before the auction, so that when you bid, you’re confident that you’re covered.
3. Refurbishment projects
For buy-to-let brokers, bridging loans are popular for light refurbishment and conversion projects:
- Updating the property for new tenants
- Targeting new sector of the rental market; such as HMO’s
- Converting housing to flats
- Extensions and redecorating
As the aftereffects of Covid-19 are being to settle, more people are looking for ways to add an office space to their home. With more people living the ‘working-from-home’ lifestyle, extensions or loft conversion are increasingly becoming a popular choice as a way to expand.
These scenarios can be difficult to cover through traditional lending, such as a high street bank. Particularly in the current climate. As developments usually take between 3 – 6 months to finish, a bridging loan is a good alternative finance solution.
4. Committing to commercial & semi-commercial
If you have a client who’s looking to expand their real estate portfolio, a bridging loan is an ideal solution when purchasing commercial property. Much like with residential properties, this is usually due to the speed in which funds can be deployed. Due to the nature of the asset, long-term lending can become slightly more complicated to arrange. A bridging loan allows the investor to complete without the worry of the sale falling through.
5. New build investments
Buying new builds are great buy-to-let investment opportunities and are popular with many oversea clients. Bridging loans are usually required when the buyer isn’t able to secure the funds by the completion date. This puts the borrower at risk of losing their deposit. The period of exchanging and completing on a new build, is often less than 2 weeks. Meaning fast funding is crucial.
If there is a delay in the long-term lending process, this can add pressure to the buyer. This is where a bridging loan comes in. As funds can be released in a matter of days, this allows the buyer to complete with plenty of time left over.
In such a competitive market, bridging loans are an essential part of the market. Alternative finance is taking a lead on investment opportunities. Moving quickly on prospective properties is vital. Just as quickly as they appear, they’re gone.
These are just some of the common reasons why bridging loans have become a staple favourite when it comes to financial investment. Finding stable lending and having funding certainty is a key, so MFS is a great place to start.