Bridging finance and bridging loans have become increasingly popular over the last few years. This growth is due in part to the large scope of projects for which this type of financing can be used.
Depending on an individual’s unique circumstances and the details of the project in which financing is needed there are several types of bridging loans that can be used in order to best fit any given situation.
Because there are different kinds of bridging loans, it is important to consult with a finance specialist in order to ensure the right loan is being applied to maximize the funding’s benefits.
Bridging Loan Overview
Bridging loans, or bridging finance, are a short term solution that helps individuals “bridge the gap” between financial transactions. These loans are usually extended for a period of up to a year but can be longer depending on the agreement that is made.
Bridging loans can be used for a variety of purposes, including land and property development, property investment, equity release, real estate endeavors and more. This wide range of uses, partnered with the quick release of funds and short term borrowing, is what makes bridging finance so popular among real estate investors and property developers.
What is an Open Bridging Loan?
Open bridging loans are generally used by consumers who are looking to quickly purchase new property before selling a property they currently own. In this type of scenario, when no contracts have been exchanged or approved for the sale of the current property, lenders will consider extending financing to be at a high risk since there is no definitive repayment date, which is also known as an exit strategy.
Without a secure exit strategy, lenders can only make an estimate as to when the loan will be repaid. In this case, a loose timeline of when the loan should be repaid will be attached to the loan, usually when the lender and applicant believe the sale of the current property will be complete.
What is a Closed Bridging Loan?
Much like open bridging loans, closed bridging loans are often used when someone is interested in purchasing property. Closed bridging loans, however, can only be approved when the sale of the current property has already begun. The requirements for this type of loan are that there is a definite date of sale of the current property and a set date in which the loan will be repaid, usually shortly after the property sale is complete.
Lenders will view this type of loan as a much lower risk, which will help to offset some of the costs associated with taking out the loan.
What is a Commercial Bridging Loan?
Commercial bridging loans can be used for a wide variety of commercial applications. These types of loans can be used when organizations need emergency funding, an injection of funds to help with cash flow, or need financing to purchase a new property or begin an expansion or construction project.
Commercial bridging loans can be obtained quickly and easily to help meet important deadlines and can be used for any purpose as long as it is for a commercial application related to a commercial property and a commercial property is available to use as security on the loan.
What is a Residential Bridging Loan?
Just as commercial bridging loans are exclusively for commercial properties, residential bridging loans can be used for residential property applications. This type of loan is usually used by a borrower who is looking to purchase a new property or make renovations to a property that is already owned.
Residential bridging loans are often used in the interim before a traditional mortgage is secured on the property. Additionally, residential bridging loans are often repaid through a mortgage financed by a high street lender or when the property is sold.
What is a Land Purchase Bridging Loan?
Purchasing land comes with a great number of rules, price fluctuations and regulations. Land purchase bridging loans often help land and property developers navigate the pitfalls that come along with making this kind of purchase. These types of loans can be sourced and obtained on very short notice which can help borrowers secure great deals on the property they wish to acquire.
Additionally, funds through a land purchase bridging loan are always available to the borrower, making it much easier for them to make a sale or make last minute changes to an overall plan.
What is an Auction Bridging Loan?
Many property developers purchase properties at auction very inexpensively. The trick with making purchases at auction is that the sale is never guaranteed and there is no set price involved. Because of this, borrowers turn to auction bridging loans to help ensure the funds they need are available when it is time to purchase.
Generally, auction winners will have to pay 10 percent of the property’s value the day of sale and the remaining 90 percent within 28 to 30 days after the auction closes. Auction bridging finance can be arranged quickly, making these fast transactions possible for buyers.