MFS Top 5: Uses of Bridging Loans

Posted by Market Financial Solutions on 8th September 2021 -

There are many reasons why people using bridging finance over traditional forms of finance such as a mortgage. Here we’ll be uncovering our top 5 uses of bridging loans. We’ll also provide alternative uses that may be of interest for property investors, developers, and homeowners.

 

1) Fast property finance to overcome delays

One of the key reasons that people turn to bridging loans is because they are fast. Instead of taking months, bridging finance could see funds in your account in a matter of days.

For many homebuyers, using traditional long-term lending such as a mortgage can be a long process. On average, a mortgage can take up to 130 days. This can be frustrating if you are looking to complete on a property investment with a tight deadline and can put a borrower’s deal at risk of collapsing.

Property chains:

The fast-paced nature of the UK property market means buyers often find themselves stuck in property chains. The longer the property chain, the higher the risk of a deal collapsing.

In some cases, broken property chains are unavoidable. There are several reason why they may break:

However, you could use a bridging loan to avoid these issues. They provide you with the opportunity to purchase your new property before the sale of your original asset, do refurbishments on your property, or even move quickly on a purchase without having to wait for mortgage approval.

 

2) Capital gains through property portfolios

This is a common usage for unregulated bridging loans by landlords, property investors, or offshore investors looking to invest in UK assets. The property market is constantly changing.

The announcement of the stamp duty holiday in July 2020 re-ignited the property market following the first lockdown. Property prices have increased dramatically, making bricks and mortar a popular investment option for many investors in a time of instability and confusion. The Government House Price Index for June 2021 shows that in 12 months lading up to June, the UK average property price rose by 13.2% 10% to £266,000 across the UK.

Source: Office of National Statistics

If you’re looking to invest in UK property, location is an important factor you’ll need to consider. The top 3 English regions to have seen the largest annual increase in average property value for June 2021 were:

1) North West with an annual property value growth of 18.6%

2) Yorkshire and The Humber with an annual property value growth of 15.8%

3) North East with an annual property value growth of 15.3%

Many Northern regions have seen tremendous growth throughout the pandemic. Properties situated in the north of the country are comparatively cheaper.

A great place to purchase unusual or undervalued properties is via auction. Many property auctions offer both residential and commercial properties for sale. Bridging lenders provide dedicated funds for auction finance. This is because when you buy properties from auction, you’ll often receive a tight timescale of 28 days to complete your purchase.

You can find out more about our auction finance and how our bridging loans can help by clicking here.

 

3) Funding conversions or refurbishment projects

Neglected or damaged properties can hold great potential for increasing yield by unlocking ‘hidden’ equity. Damage can lead to a property bring undervalued, making them easily accessible renovation projects for property investors. A bridging loan allows you to take advantage of these assets by renovating them quickly, increase their value and then sell on for a profit. Bridging finance can be in your account within a matter of days meaning works can be start imminently.

But development bridging loans are available for more than just buildings that need a total overhaul. Permitted development and light refurbishment finance can help enhance buy-to-let or residential properties that need general refurbishments. This could be fitting a new kitchen or bathroom, providing new flooring, updating plumbing replacing items and fixing general wear and tear damage.

For residential properties, conversion developments can be a potential way to increase property value. With more people working from home, converting rooms into home offices has become a popular way to attract buyers. Loft conversions are a great example how bridging loans can help attract buyers or increase value, particularly if you’re interested in adding an additional bedroom to the property. The rise in value could see as much as 20% added onto your property’s current worth.

You can read more about the different styles of development finance and the difference between permitted development and light finance in greater detail here.

 

4) Business Capital

As previously mentioned, many bridging lenders will lend to Limited Companies, as well as individuals. This means that bridging finance can be utilised by a company to:

• Expand and grow their current enterprise
• Start a new business venture
• Purchase a new commercial building such as a warehouse or office buildings

Much like residential bridging loans, semi-commercial and commercial loans are often sought after due to their impressive speed. Long-term commercial lending can take a long time due to the nature of these assets, due to their complexity and company structures. It can also be deemed riskier for the lender.

A bridge loan allows you to invest quickly, should a unique opportunity arise. Whilst we provide the funds in the short-term, you can then organise traditional finance as a long-term solution without the worry of missing out on a great investment opportunity or potential regulation and lender delays.

 

5) Refinancing

Refinancing is when you take out a new loan to repay your current lender, either alternative or traditional finance.

A general example of refinancing is: If you were to come to the end of three-year mortgage fixed term, you would then need to remortgage through finding a new mortgage offer; usually on a 2, 3 or 5-year term. This is so you can continue to pay off the remainder of your home’s purchase price.

How can you use bridging loans to refinance?

A refinance bridge loan can help cover a payment gap, should you be facing delays or waiting for your exit strategy – the sale of a property for example. By applying for a bridging loan, you could pay off your current lender to avoid extension charges or home repossession, depending on your lender’s flexibility and criteria. This then provides enough breathing space for you to arrange a new exit strategy or arrange a long-term financial solution.

You can also refinance a current bridging loan. This is known as re-bridging. Re-bridging enquiries often relate to loans where an exit strategy has fallen through. This can be from a buyer pulling out last minute to ongoing mortgage delays. If you require additional time to repay the bridging loan, then refinance could help.

Bridging lenders may charge a higher rate for a re-bridge as they put the lender at a higher risk. You can read about refinancing and how it works here.

 

Additional uses for bridging finance

There are many ways you can utilise bridging loans, so we’ve listed additional uses below:

• Raising additional finance (2nd charges)
• Development exit
• Development finance
• Removing adverse credit
• Avoid gazumping / broken property chains

If you have questions about bridging finance, or you’d like to discuss a potential bridging enquiry, contact us today to find out how we can help.