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Using bridge finance for a house purchase
The bridging finance sector is worth an estimated £4bn in the UK, offering post-Brexit investors and homeowners a reported “quick, flexible and cheap” way to borrow money over a short period of time.
These figures are supported by the National Association of Commercial Finance Brokers whose own data says that bridge finance is strongest area of growth for its members.
Following the economic crisis of 2008 when finance providers tightened up their lending criteria, and with Brexit casting concerns over the UK economy, it is maybe no surprise that bridging finance is so popular.
What is bridging finance?
Bridging finance is primarily used in the purchase of commercial and residential property. Also known as bridge finance, this form of short term finance does what it says on the tin – it bridges a gap in funds between when a debt becomes due and when you’ll have the monies to repay that debt.
For example, you are:
- in a property chain and need the money from the sale of your home in order to fund the purchase of your next one – but there has been a delay down the chain and you could lose your dream home if you don’t complete the buying transaction now
- purchasing a house at auction and need finance to enable you to secure the sale
- a property investor who needs a cash injection in order to get a redevelopment project off the ground.
Using the above examples, bridge finance could give you the temporary funding you need, quickly. Compared to some other forms of finance, while bridging finance may not always be the cheapest way to borrow money, it is very convenient. You also need to take in to account what you stand to lose in terms of an already paid deposit if your existing purchase falls through due to lack of funding,
How does bridge finance work?
As mentioned before, bridging finance offers a short-term loan solution (typically lasting up to 12 months though there are some providers who offer 36 months bridge finance) until some form of permanent funding becomes available.
It is suitable for individuals and businesses for any purpose, including commercial and residential property. It is generally much faster to arrange than a more traditional loan, with some providers considering your application and, if approved, putting the money in to your bank account in less than a week.
There are two types of arrangement:
- a closed bridge – this is where the date of the loan repayment is known, such as when you have a fixed completion date for the sale of a property;
- an open bridge – this is more flexible and has a proposed time period with a clear cut-off point when the loan will have to be repaid. For example, if you are renovating a property and have only a rough idea of when the work will be complete to enable a sale.
As with the more traditional forms of lending associated with property, the finance is secured against the property, so it is important that you fully understand the agreement you have as well the cost of the interest and any associated fees.
What does it cost?
The cost of the bridging finance will depend on the individual provider as well as how much you wish to borrow.
Bridging loans are typically charged on a monthly basis - normally in the range of 0.6% to 2% per month depending on the loan criteria (which, in some cases, is higher than other forms of medium and longer term borrowing).
You’ll also be charged an arrangement fee as well (typically from 0.66% - 1.50% of the loan value).
In some cases you may be able to ‘roll up’ your interest - meaning you don’t have to pay it every month but instead pay the amount at the end of the arrangement. Alternatively, you may be able to ‘retain’ the interest from the loan amount in advance, to cover the interest payments. Do note that interest will still be charged on this retained amount.
How much can I borrow?
This depends on your own unique financial circumstances. We can provide finance solutions from £50,000.
Summary
In summary, if you are looking for immediate short-term finance to help with a property transaction, then turning to an alternative finance offering such as bridge finance may offer the most suitable solution for you.
