What is Bridging and How Can You Use It?

Bridging finance is a fast and flexible loan. It allows you to purchase properties quickly or fund renovations with none of your own money. Some people misunderstand bridging finance, so they avoid it. However, it’s easy to understand, and when you wrap your head around it (which you’ll be able to do by reading this article) it’s a game changer.

Although bridging finance is typically used by property investors and developers, it is also used by homebuyers who are breaking a mortgage chain. By understanding what bridging finance is and how it works, you’ll have the key to growing your property portfolio.

What is Bridging Finance?

Bridging finance is a short-term loan that acts as the ‘bridge’ between a mortgage and other costs, like the cost of refurbishing a property. You can take out bridging finance for as little as two weeks or as long as three years, or more, depending on the agreement you have with the lender. In terms of their value, bridging loans can range from thousands to millions.

There are many uses for bridging finance, from buying properties at auction to cash-buying a home that requires a quick purchase, or that is unmortgageable. For this example, let’s say an investor is buying a property that is run-down and needs a lot of work. This can be costly, especially if they’re paying a 25% deposit on a buy-to-let mortgage.

The investor might pay the deposit with their own cash, or they might take bridging finance out against one of their existing properties, using it as collateral. In this example, we’ll say they paid for the deposit themselves.

Once the investor has a buy-to-let mortgage, they can take a bridging loan out against the new property and use it to fund their refurbishment. They can pay the loan back when value has been added to the new home by either remortgaging it or selling it for a profit.

Bridging Finance Example

Let’s use the same example as above with an investor who is buying a new addition to their property portfolio. The figures are as follows:

Purchase price: £100,000

Deposit needed: £25,000

Refurb costs (loan needed): £20,000

Time the loan is needed: 6 months

Monthly interest (1%): £200

Total loan repayment: £1,200

Although the loan has cost the investor £1,200, it has meant that they did not need to use their own finance to fund the renovation. At the end of the six-month period, substantial value has been added to the house because of the refurb. Because the investor has increased the property’s value, they are able to refinance it, pulling enough money out to pay off the rest of their bridging loan. Better yet, they have enough money left to invest in their next property.

Bridging Finance Keighley

As you can see, there are many benefits to bridging finance. It’s worth noting that they aren’t exclusive to investors. Bridging finance is fast, and it gives you access to large chunks of money in return for monthly interest repayments, just like most loans.

We offer free consultations for anyone who is debating using bridging finance to fund their next purchase. Book yours with one of our experienced team by clicking here.