Bridging finance is a short-term loan that bridges the financial gap between the purchase of a property and an exit event.
Bridging finance is fast property finance, and typically this allows you to:
- Complete on the finance within a few weeks
- Borrow up to 75% of the property value
- Add interest costs to the loan
What is bridging finance?
A bridging loan is a familiar concept in the world of property sales but is one that causes a degree of confusion in the business world. Anyone who has been through an awkward house purchase where different parts of the chain do not quite match up knows what it is all about.
In business, the general principle is no different. Bridging finance is not a long term financial tool. It is a short term solution to a specific problem, usually one related to property or real estate. It makes cash available to facilitate a purchase while you arrange for either cash to arrive or a longer-term credit solution to be implemented, which will allow you to pay it off.
Due to the speed of arranging bridging finance it is commonly used to purchase property at auctions. This is otherwise known as auction finance.
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How does bridging finance work?
The short-term nature of a bridging loan makes it quicker and easier to put in place than a mortgage. Here’s how it works:
- Indicative offer. Lenders will typically give an indicative offer within a day or two of application.
- Valuation. The lender will instruct a valuation. This can take a week or so, and the report is then reviewed by the lender.
- Legal due diligence. Once the lender is satisfied with the valuation report solicitors are instructed.
- Completion. If your solicitor is responsive and experienced in property transactions, completion can be quick. Often this can be within 2 or 3 weeks of application.
Typically lenders will lend up to 75% of the purchase price, although often they will use a conservative valuation figure. A legal charge will be taken over the property being financed.
While a bridging loan can be agreed for 12 to 18 months, it is often repaid sooner. This is advisable to minimise the cost of finance.
How much does a bridging loan cost?
Bridging finance is a short-term mechanism to raise significant funds quickly. So it will come as no surprise to know that interest rates are typically higher than a mortgage. Therefore it is important to shop around to get the best deal.
Using a comparison platform with access to multiple lenders can help you get the best possible deal.
Some lenders will allow you to defer the interest payment till the end of the loan. This can be a real bonus if money is tight during the financing period.
You should typically expect to pay:
- An arrangement fee in the region of 2%
- A monthly interest rate from 0.5% – 1.5%
- A valuation fee
- Legal fees (both your legal fees and the lender’s legal fees)
Exiting bridging finance
The main thing that the lender will want to see is that you have an exit strategy in place. In other words, you need to show them how you are going to be able to repay it. Typically bridging finance is repaid by refinancing the loan, or by selling the property.
What can bridging finance be used for?
We mentioned earlier that bridging finance is most commonly used for property transactions. However, this is not necessarily a rule that is set in stone. The lender is mostly interested in understanding the exit strategy. As long as this is clear, the exact purpose is of secondary concern. If you need a short-term cash injection for some other business purpose, bridging finance could still be a solution.
As ever, the best thing to do is get some independent advice on the different finance options that are available.