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BRIDGING

Bridging loans are a short term finance, which can be used by clients for a variety of purposes.

At Diamond Property Finance, we provide efficient, effective, and speedy bridging loans to individuals, sole traders, partnerships, and limited companies.

Our range of bridging loan products covers a variety of needs, including:

  • Auction purchases with quick completion timeframes
  • Chain breaks to bridge the gap between expected or unexpected purchases
  • Light or heavy refurbishments, for small or large renovation projects
  • Development loans, for smaller development projects
  • Below market value purchases, for discounted acquisitions
  • Capital raise, for almost any purpose.
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Bridging Loans Explained: A Quick Guide for Property Investors

For investors navigating property finance, understanding the distinctions between a bridging loan and a traditional mortgage is crucial for making informed decisions.

What is the difference between a bridging loan and a traditional mortgage?

Typically used to “bridge” the gap between the purchase of a new property and the sale of an existing one, a bridging loan can also be particularly useful in scenarios where immediate funds are required. For example, purchasing a property at auction, refurbishment, or avoiding a property chain break.

Due to their short-term nature, bridging loan interest rates tends to be higher than traditional mortgages. However, can offer more flexibility and be secured against various types of property including residential, commercial and land.

One significant advantage of bridging finance is that lenders can approve it quickly, resulting in fast access to funds. This makes bridging loans for property development a great finance solution for investors or buyers requiring immediate liquidity.

In contrast, a traditional mortgage is a long-term financing option used to purchase residential property. It involves borrowing a substantial sum of money to be repaid over an extended period, with the property itself serving as collateral.

When compared with bridging finance, traditional mortgages offer increased stability and mostly have more affordable interest rates due to their longer term length.

For property investors, clients may choose a bridging loan to purchase the property before refinancing to a traditional mortgage by way of exit strategy. Some clients choose this approach to reduce the monthly loan commitment; something more preferable when owning property long term.

Residential bridging loan

Bridging loans for residential property can provide immediate funds to buyers in scenarios such as broken property chains, securing land prior to planning permission being granted, securing a dream home before selling their current property or purchasing at auction. It’s a short-term property finance solution for investors looking to purchase property or land, that will be solely residential.

Residential bridging loans may also allow developers to buy uninhabitable properties (no kitchen or bathroom facilities) therefore making them ineligible for traditional residential mortgages. Developers then refurbish the property to a habitable state, before selling or letting.

Unlike traditional mortgages, residential bridging loans are likely to be approved based on the value of the purchase property and the exit strategy, rather than the borrower’s ability to meet the repayments. Residential bridging loan rates may also be higher due to their short-term length.

Commercial bridging loan

Commercial bridging loans can be very useful in a property investors toolkit, allowing them to maximise opportunities and invest where traditional financing may not be available. For example, previously developed land that is no longer used, or run-down commercial premises.

As commercial bridging loans offer short-term financing, they can also be used in scenarios unrelated to property development. For example, a start-up venture, working capital for a business, equipment and machinery buying, or financing tax liabilities.

With any commercial bridging loan for property development, lenders will want to the ensure the exit strategy is clearly defined from the outset.

Regulated vs non-regulated bridging loans

Bridging finance can either be regulated or non-regulated, depending on which type of bridging loan an investor chooses.

Regulated by the Financial Conduct Authority (FCA), a regulated bridging loan adheres to stringent protection standards, providing borrowers with a higher level of security and transparency. It is ordinarily used for residential properties that will be occupied by the borrower or an immediate family member.

On the other hand, non-regulated bridging loans offer fast, flexible finance tailored to a borrower’s situation. The FCA does not regulate bridging loans used for investment property, buy-to-lets, or commercial real estate. Therefore, all commercial bridging loans are unregulated.

FREQUENTLY ASKED QUESTIONS

What is a bridging loans?

A bridging loan is short-term financing designed to bridge a gap between the purchase of a new property and the sale of an existing one. It provides immediate funds, allowing individuals or businesses to proceed with property transactions while awaiting long-term financing. Typically, it’s a temporary solution to cover the interim period between property transactions.

How do bridging loans work?

Bridging loans work by offering quick access to funds, enabling borrowers to secure a property promptly. They are often used when there’s a delay in selling a property, and immediate capital is needed for a new purchase. The loan is secured against the borrower’s existing property or the one being purchased. Once the property is sold or long-term financing is arranged, the borrower repays the bridging loan, including interest.

How much do bridging loans cost?

Bridging loans in the UK typically cost 1-2% of the loan size as an arrangement fee charged by the lender, plus monthly interest rates ranging from 0.45% to 2%. Other fees to consider include valuation or survey fees, legal fees, broker fees, and other admin fees such as drawdown and redemption fees. The total cost of a bridging loan can vary depending on the lender, loan amount, and loan terms. It’s important to note that bridging loans are typically short-term loans, and interest is calculated monthly to ensure you only pay interest on the months you have the loan for.

How long do bridging loans take?

Bridging loans are known for their speed. The approval and funding process can take anywhere between 72 hours to two weeks to complete, depending on the lender and the individual’s circumstances, making them a swift solution for urgent financial needs. However, the exact duration depends on factors such as the complexity of the transaction, property valuation, and the efficiency of the involved parties.