The most commonly known reason to get a bridging loan is to fund the purchase of another property while you are still selling your existing one. However, bridging loans can be used in many other ways to support the growth and financial needs of individuals and businesses.
This includes buying a property at auction, where a traditional mortgage lender could not issue funds in time to cover the purchase, to buy a property that wouldn’t be covered by a traditional mortgage from a high street bank or to handle issues of poor credit. It’s also possible for a combination of these factors to be the reason to use a bridging loan.
Sometimes a property may need significant renovations or complete redevelopment in order to make it generate a return at sale or as a rental. Sometimes, the condition of these properties will not meet the requirements of a buy-to-let mortgage, or funds are needed quickly to start the work. In this case, a bridging loan is used to provide the capital to complete the renovations and then exit or pay off the loan by moving to a buy-to-let mortgage or selling the property.
An example of this would be a landlord who has a maturing commercial mortgage but cannot renew their deal due to the supporting tenancies of the property coming to an end. The landlord doesn’t want to rush the negotiations, so a bridging loan can buy them time to complete the new tenancy contracts and then exit the bridging loan returning back to a standard commercial mortgage.
A property developer may have hit a snag and is running out of time before their property development finance ends. This type of bridging loan called ‘finish and exit’ or ‘marketing’ funds the completion of the development, enabling the developer to exit to a buy-to-let mortgage or sale of the property.
If a business is looking to raise equity from the sale of shares, it can choose to use a bridging loan to cover the costs of running the business in the meantime.
A finish and exit bridging loan provides funds to finish a development as part of the exit plan to pay off the bridging loan.
Borrowers should remember that bridging loans come with higher interest rates and fees compared to traditional commercial and buy-to-let mortgages and are designed for periods of short-term finance only.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.