Property finance is nothing new, with mortgages having been around for a very long time. However, over the years an increasing number of bespoke property finance options have emerged. This includes bridging loans, auction finance and various other bespoke offerings for the specific needs of particular property owners in circumstances where they require short term finance secured on their property.
There are also a range of development and refurbishment finance options that can go a long way in improving a property, increasing its value and helping take it to the next level with regards to rental yields and general living space.
These short-term property finance options are for the most part regulated, but by their very nature do have slightly higher interest rates attached. However, when structured properly, the interest can be fairly negligible as the return on investment through the property pays for itself.
Who is Bridging Finance for?
Bridging loans are one of the most established short-term property finance options with the industry being estimated to be worth more than £4 billion in the UK such is their popularity. They work to literally bridge a gap when it comes to property purchases and sales.
For example, a homeowner is looking to take the next step up the property ladder by moving from their £500,000 current home to a larger £750,000 valued property. By using up their savings, they have put down a deposit of £100,000 for the second, new property, with the £500,000 from their property sale to pay off all but £100,000 of the new property’s value, which will be paid off through refinancing the property by taking out a normal mortgage.
They have found a buyer who is close to completing on the purchase of their property. However, at the last moment the buyer pulls out of the property transaction. This leaves the property owners with several dilemmas. If they don’t sell their current property in time they will not be able acquire the £500,000 they need to all but pay off the purchase of the second property. Furthermore, by the sale falling through, they will likely lose most if not all of their hard-saved deposit.
How Do Bridging Loans Help?
Rather than having to submit to the falling through of an important property sale and subsequent purchase, the homeowner in question can take out bridging finance. The bridging loan will be for the entire property value to be purchased; £750,000. Unlike in the case of unsecured personal loans like payday loans, the homeowner then needs to get their ‘exit strategy’ in motion. An exit strategy is the way in which they will ‘exit’ the bridging loans [pay it off in full.]
The exit strategy in this case will be the sale of their first property and the subsequent refinancing of the new property once they have completed their purchase. Having purchased the new property, they can now look for a buyer for their initial property which does entail owning two properties at once for a period.
However, once a buyer is found and the deal is concluded, the property value of their first property goes straight towards the bridging loan repayments. the remaining £250,000 plus additional interest and charges is then repaid by refinancing their new property they now own. A normal mortgage can be taken out against the value of that property and repaid at a lower interest rate and over a longer period of time.
Who are the Lenders?
Bridging loans can be taken out through a variety of lenders and brokers. However, it is crucial that the lender you use to borrow the bridging loan from is regulated by the Financial Conduct Authority (FCA) and is a trusted and established lender. This way you can be sure that you will receive the bridging loan best suited to you and your specific situation. Moreover, you will receive the most favourable rates making repayments that bit easier.