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Categories: bridging loans | guides
When you are looking to buy a property, whether for personal or investment purposes, you are likely to come across various financing options. Using cash or a mortgage are the most typical methods. But, you can use a bridging loan for house purchases.
They are used when you need a short-term borrowing solution for various reasons.
In this guide, we will cover the basics of bridging loans and how they can be used to buy property for rental purposes, or where you are flipping property (buying, renovating and selling property for profit).
What is a bridging loan?
A bridging loan is a short-term borrowing solution. It is intended to be temporary and fill a financing gap. Bridging loans for house purchases are often used for the following reasons:
- You need to buy a property quickly where a mortgage would take too long to arrange
- You are buying a property that is not suitable for a mortgage (it doesn’t have a functioning bathroom and /or kitchen)
- You are buying land with the intention of building a property on it, but there is no property on it at present
The loan is secured against the property (or the land, if a property hasn’t been built yet). You will need to put down a deposit of at least 20% (and more commonly 25%) of the property value, often deposit amounts can be higher too. The loan is intended to be paid back quickly, typically within 6-12 months, but up to a maximum of 24 months.
How bridging loans work
Bridging loans are designed to provide short-term financing for property purchases.
Bridging loans interest rates are typically higher than traditional mortgages, due to the short-term nature of the loan. They also often have higher fees and charges associated with them than a mortgage.
However, they can provide a useful financing option for those who need to purchase a property quickly, or need to renovate a property before it is eligible for a mortgage (see our guide to bridging loans for property developers).
Using a bridging loan to buy a property for rental purposes
Usually if you take out finance to buy a rental property you would use a buy to let mortgage. But, if you need to move more quickly to secure the property than a mortgage will allow, a bridging loan can help. You would pay the loan off with the buy to let mortgage, once it has been arranged.
Or you might be buying a below market value property that you intend to renovate, to increase its value and sell for a profit, or bring it up to a lettable standard, and then rent it out. In this situation you would initially use a bridging loan to purchase the property, then ‘exit’ to a buy to let mortgage (pay off the loan with the mortgage) or sell the property and pay back the loan with the profits.
You can also buy commercial property (see our guide on “Commercial bridging loans”) with a bridging loan, where you would pay off the bridge with a commercial mortgage. Or, if you are flipping it (doing it up to sell for a profit), sell the property and use the profits to pay back the loan.
Potential risks of using a bridging loan
While a bridging loan can be a useful financing option, there are also potential risks that should be considered.
One risk, where you are flipping property, is that if you are unable to sell the property, you may be unable to repay the loan. Make sure you understand what you are likely to be able to sell the property for, once you have renovated it.
You need to be confident the new value:
- Covers the cost of the works needed to the property;
- Covers the cost of buying the property;
- Will achieve a worthwhile amount of profit over and above your costs to ensure flipping the property is worth doing.
An alternative risk, if you aim to keep the property and rent it out, is that you cannot secure long-term finance on the property. This can lead to you being stuck with a costly bridging loan to pay.
To avoid this:
- Establish whether long-term finance is going to be possible on the property (a broker can help you)
- Do not take out a bridging loan if you are going to be unable to secure long term finance
It's important to carefully consider the risks and benefits of using a bridging loan before making a decision. A reputable bridging loan broker can help you establish if there are lenders who will offer you a bridging loan. That broker may well also be able to help you arrange long-term finance such as a buy to let mortgage or commercial mortgage.
For example, Commercial Trust brokers all of these products and we can help you secure long-term finance as well as finding you a great deal on a bridging loan.
Points to remember about bridging loans for house purchases
Using a bridging loans for a house purchase help in a number of situations, when you need to move quickly when buying property. They can also be a useful tool for property investors who want to buy and renovate properties to rent them out, or for developers who need to purchase land for development.
It's important to carefully consider all the associated costs and risks, including interest rates, before deciding if a bridging loan is right for you.
Remember to do your research and consult with a qualified professional before making any financial decisions. With proper planning and guidance, a bridging loan can help you achieve your property investment goals and generate a steady stream of rental income for years to come, or help you flip property for a profit, depending on your investment strategy.
For help finding a bridging loan deal, get in touch with the experts at Commercial Trust. We are a specialist broker and can help you get a great bridging loan deal.
