Bridging Loans for House Purchases: A Detailed Guide

By Georgia Galloway | Monday 14th August 2023 | 5 minute read

Understanding the intricacies of a bridging loan for a house purchase will help ensure a smooth transaction. This type of financing offers a quick and flexible solution, mainly when time is of the essence.

A bridging loan is an alternative finance solution that has become increasingly popular. A bridging loan can be beneficial for those seeking to move swiftly from one residence to another, supplying them with temporary capital to bridge the space between selling their current house and buying a new one.

Estate Agent 'SOLD' sign

Understanding Bridging Loans for House Purchase

In property finance, bridging loans have carved out a niche as an effective tool for swift access to funds. These short-term financing options offer immediate liquidity, enabling borrowers to secure properties promptly while awaiting long-term funding or proceeds from property sales.

Bridging loans work differently from traditional mortgages; they can be secured against diverse assets, including residential and commercial properties intended for rental or personal use, land without planning permission, or even plots earmarked for development.

The Mechanics of Open and Closed Bridging Loans
Categorised by their repayment structure, open and closed bridging loans offer different options. An open variant does not stipulate a fixed repayment date but expects settlement within 12 months. Conversely, closed counterparts come with precise mortgage end dates set at inception.

This flexibility allows borrowers to tailor their choice based on individual circumstances and financial plans. For example, if you're confident about selling your current home within six months, opting for the lower interest rates offered by a closed bridge might prove beneficial compared to its counterpart's higher charges.

First Charge vs Second Charge Bridging Loan
A first charge loan places the lender ahead in terms of priority over other lending secured against your asset should default occur; hence 'first charge'. A second charge arises when another lender already holds precedence due to, perhaps, an existing mortgage, yet additional borrowing using the same security is still desired. Remember that failure to meet repayments could lead to loss of ownership, so always ensure affordability before proceeding with such arrangements.

The Process of Buying a House with a Bridging Loan

Seeking to purchase property in need of refurbishment? Looking for an efficient and swift financial solution that works outside the norms set by traditional mortgages? A bridging loan might be your answer. Bridging loans are applicable for purchasing the following types of properties: 

  • Houses 
  • Bungalows 
  • Flats 
  • Semi-commercial properties 
  • Holiday homes 

Using Bridging Loans for Unmortgageable Properties

Bridging finance opens doors to properties considered unsuitable or 'unmortgageable' by high street banks. Whether non-standard construction homes need renovation or auctioned-off properties require quick completion timescales, bridging loans for unmortgageable properties have covered you.

This flexibility empowers investors and developers alike to seize opportunities swiftly, even unconventional ones. For instance, this form of specialist finance allows one to borrow money against land without planning permission - something not typically offered by mainstream lenders.

Funding Acquisition through Bridging Loans
Compared with securing traditional mortgages from high street banks, which often involves lengthy processes, obtaining funds via a bridge loan is notably quicker - usually within seven working days post-approval. Remember, though: while our calculator gives an idea about potential costs involved, including interest rates, etc., actual charges will depend on individual circumstances like credit history, among other factors.

Navigating Repayment Strategies & Exit Plans
An integral part of any borrowing journey is understanding repayment strategies - commonly called 'exit strategy'. Given that these are short-term solutions (usually up to 12 months), having clear exit plans becomes crucial before entering into agreements.

Possible exit routes include selling the purchased property outright after renovations or refinancing onto long-term mortgage products once its value has been enhanced due to improvements made during the ownership period. Remember always: failing to meet deadlines could result in additional fees and repossession, so ensure your plans are realistic and committed to yourself financially.

When would a bridging loan be employed to purchase a house?

Bridging loans are typically employed in specific scenarios where a quick infusion of funds is needed to purchase a house or property. These scenarios often involve unique circumstances or time-sensitive opportunities that may not be well-suited for traditional mortgage financing. 

Here are some common scenarios where a bridging loan might be employed for purchasing a house: 

Property Auctions: When buying a property at an auction, the buyer usually has a limited time to complete the purchase, often within 28 days. Bridging loans can provide the necessary funds quickly to secure the property without waiting for a traditional mortgage approval process. 

Property Development or Refurbishment: Investors or developers looking to buy a property for renovation or development might need immediate funds to acquire and start the work. Once the property is improved, they might sell it at a higher value or secure long-term financing. 

Property Chains and Time Sensitivity: A bridging loan can bridge the gap when a buyer has found their ideal property but hasn't sold their existing home yet. It provides funds to purchase the new property while waiting for the sale of the current property. 

Unmortgageable Properties: Bridging loans can be used to purchase properties that are considered challenging to mortgage due to their condition, non-standard construction, or other reasons. Investors can use bridging finance to buy such properties, renovate them, and refinance with a traditional mortgage. 

Property Flipping: Property flippers buy properties to sell them quickly for a profit. Bridging loans provide the necessary capital for purchasing and renovating the property to sell it quickly. 

Property Chain Breaks: If a property chain breaks due to a buyer's inability to secure a mortgage in time, a bridging loan can provide a temporary solution to ensure the purchase of the desired property isn't jeopardised. 

Buy-to-Let Investments: Investors looking to purchase rental properties might use bridging loans to secure properties and begin generating rental income before arranging a longer-term mortgage. 

Downsizing or Upsizing: When individuals want to downsize or upsize their homes, bridging loans can help them secure the new property while waiting to sell their home.

Risks Associated with Bridging Loans

Bridging loans, while an effective solution for rapid property purchase or development, comes with certain risks. Potential borrowers must comprehend these before opting for this type of finance.

Higher Interest Rates and Extra Charges
The nature of bridging loans often sees them carrying higher interest rates than traditional mortgages from high-street banks. Designed as short-term financial solutions to 'bridge' the gap between acquiring a new asset and selling off an existing one, their brief loan term necessitates increased rates for lenders to secure profits within limited periods.

Apart from elevated interest rates, additional charges could be tied up with bridging loans, such as administration fees or arrangement costs. These can accumulate rapidly, leading to a significant rise in overall borrowing expenses.

Comparing Bridging Loans with Traditional Mortgages

In property finance, bridging loans and traditional mortgages are two distinctive options. They differ in cost implications, flexibility offered, application process duration, and appropriateness for various property purchases.

The Cost Implication
Bridging loans have a unique characteristic: they tend to carry higher interest rates due to their short-term nature. However, these can be viable solutions when rapid access to funds is required - perhaps for securing your dream home or an investment opportunity.

On the other hand, traditional mortgages, provided by high street banks, often offer lower interest rates spread over a longer loan term but may come attached with early repayment charges if you choose to settle your mortgage ahead of its fixed repayment date.

Versatility & Application Procedure
A significant advantage of bridging loans over conventional mortgages lies in their versatility. These specialist finance tools can be secured against properties deemed unmortgageable or those undergoing refurbishment - making them popular among land speculators and developers seeking alternative lenders beyond mainstream banking institutions.

Furthermore, unlike applying for a standard home purchase or remortgaging, which might take weeks before approval from existing financial providers such as precise mortgages, applications for bridging finance typically get approved within seven working days - offering speed essential at auctions or where there's urgency in completing a sale transaction.

We're experienced financial experts who arrange short-term bridging loans for property owners, securing you the best deal from over 200 bridging loan providers, including private investors and family offices.

Get expert assistance today; we're on hand to answer any questions about bridging loans.

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Call our friendly team on 01202 612934, we're ready to help.

Bridging Loans for House Purchases FAQs

Is it worth getting a bridging loan?

Bridging loans can be worthwhile if you need swift, short-term finance for property transactions, especially in complex situations or where traditional mortgages fall short.

Is a bridging loan cheaper than a mortgage?

Generally speaking, the interest rates on bridging loans are higher than those on traditional mortgages due to their flexibility and quick nature. Whilst a mortgage is likely to be repaid over 25 years or more, a bridging loan often lasts between 1-2 years. 

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