As a flexible and convenient borrowing option, UK bridging loans have gained in popularity over recent years, allowing borrowers to access the financial support they need. A bridging loan is a short-term loan that is typically used to bridge the gap between the purchase of a new property and the sale of an existing one. Yet, these loans are not limited to property transactions alone. In the UK, bridging loans can be used for a variety of purposes, offering a solution for individuals and businesses in need of quick funding.
How Do Bridging Loans Work?
Bridging loans are designed to provide short-term financing, often ranging from a few weeks to a few months, until a more permanent financial solution can be arranged. Unlike traditional loans, which involve a lengthy application process and strict lending criteria, bridging loans offer a quicker and more flexible alternative.
The amount you can borrow with a bridging loan will be based on the value of the property itself as this can be used as collateral – known as the loan-to-value ratio (LTV). Bridging loan lenders typically offer bridging loans with a LTV of up to 75-80% of the property value. The borrower will also pay interest on the loan, either monthly or as a lump sum at the end of the term, which will impact the total cost of the loan.
Types Of Bridging Loans UK
There are two options when it comes to bridging loans in the UK: open and closed loans. When deciding on the type of loan to opt for, it is important to understand how each loan works, any associated costs, and the repayment expectations. If you are unsure as to which loan to choose, it might be beneficial to speak to an expert or advisor to run through your options.
Closed Bridging Loans
Closed bridging loans are suitable for borrowers who have a predetermined exit strategy. For example, if you have exchanged contracts on the sale of your existing property and are waiting for the completion, a closed bridging loan can provide the necessary funds until the sale is finalised. These loans typically have a fixed repayment date.
With a closed bridging loan, the lender will wish to see evidence of how you plan to make repayments, so it is a good idea to assess this prior to your application.
Open Bridging Loans
Alternatively, open bridging loans are more flexible in terms of repayment. They are suitable for borrowers who have not yet finalised their exit strategy, so if you are planning to purchase a new property but have not yet found a buyer for your existing property, an open bridging loan can be used to bridge this financial gap until your property is sold. These loans usually have a longer repayment period but may come with higher interest rates.
How Can I Use A Bridging Loan?
Despite bridging loans commonly being associated with property transactions, they can be used for a range of other purposes such as renovations, developments, business purposes and more. Lenders will be more concerned about your ability to make repayments rather than the purpose of the loan, yet they will still need to know how the loan will be used.
Property Purchase: When there is a time lag between the sale of one property and the purchase of another, bridging loans can cover the down payment or provide the full purchase price until funds from the sale are available.
Renovations: Bridging loans can finance home improvements, renovations, or refurbishments, allowing homeowners to enhance their property value before selling or refinancing.
Business Needs: Common business tasks such as cash flow management, business expansion, and stock purchases can benefit from a bridging loan.
Auction Purchases: When buying properties at auctions, speed is crucial. Bridging loans offer a quick and accessible financing option to secure the property before arranging long-term funding.
How To Apply For A UK Bridging Loan
If a bridging loan could work for you, you’ll need to find a reputable UK lender who specialises in bridging financing. Your chosen lender should arrange for a valuation of the property to determine its market value and confirm the loan-to-value ratio. Provided your application is successful and you accept, the loan should be transferred to your bank account shortly after.
For more information about bridging loans UK and financing, feel free to contact the Magni Finance team where we’re more than happy to help. Get in touch today.