Who uses bridging loans?

By Georgia Galloway | Thursday 17th August 2023 | 5 minute read

Bridge loans, often seen as a finance lifeline in the property market but can be utilised for almost any purpose, are used by a wide range of individuals and businesses.

A hand holding a building brick between its thumb and forefinger. The brick they're holding is being placed on top of two separate piles of bricks to create a bridge between the two.

A bridging loan's primary purpose is to provide swift financial support during transitional periods.

Our guide will explain who uses bridging loans, and what they use them for.

Bridging Loans Explained

As the name suggests, a bridging loan serves to 'bridge' a financial gap. Landlords and property investors often seek these short-term finance solutions when they require swift access to funds. But they can be used by almost all individuals or businesses as long as they have a solid exit strategy, usually the sale of property or refinancing.

One must not confuse bridging loans with traditional mortgages; these two forms of lending serve different purposes and have unique structures. Mortgages involve long-term commitments spread over the years, whereas a bridge loan can provide temporary relief until more permanent financing is secured.

The nature of this type of borrowing inherently makes it high-risk. Therefore, borrowers should always ensure that an effective exit strategy is in place before entering into such agreements - for instance, selling another property or securing longer-term finances like exchanged contracts on a house sale.

Uses for Bridging Finance

If you're in the property development sector and need a swift financial solution, bridging finance could be your answer. A bridge loan is used by various individuals and businesses for various purposes, not limited to the property sector. 

Our 2023 Bridging Finance Report found the top 5 uses of a bridge loan (for people that have used them more than once): 

  • Purchase residential main residence property - 38.40% 
  • Purchase residential investment property - 31.07% 
  • Purchase commercial property - 27.46% 
  • Purchase land with planning - 26.59% 
  • Finance the heavy refurbishment of a property (major renovation or structural works) - 20.90%

Bridging Loans for Property Refurbishment

Property refurbishments: Often, developers need quick access to funds for substantial renovation projects before they can sell properties outright or secure a buy-to-let mortgage. In such situations, it's not uncommon that traditional mortgages may fall short due to their longer approval processes or reluctance towards financing properties requiring extensive work.

This is when bridging loans step in. These provide immediate capital, allowing developers to swiftly complete necessary renovations - from structural changes like knocking down walls or roof replacements to lighter touch-ups.

Using Bridge Loans for Auction Purchases

Auction purchases: Purchasing at auction requires prompt payment - typically within 28 days of winning a bid - which often proves challenging with traditional high street banks' mortgage rates given their lengthier approval timescales.

In these cases, potential buyers turn towards bridging finance solutions. Offering rapid approvals and disbursements compared with conventional lenders, bridge loans ensure obligations are met timely without losing investment opportunities.

Popular Uses for Bridging Loan Borrowers

The rise in popularity of bridging finance has correspondingly led to a wider range of applications that borrowers have discovered for this financial tool. These circumstances give a clear understanding of who uses bridging loans:

  • Chain Breaks: In property chains, delays in selling one property can hold up the purchase of another. A bridge loan can help break this chain by providing interim financing. 
  • Downsizing Property: When a property owner is seeking to buy a smaller house before selling an existing property. For example, where it's taking longer to sell but the borrower wants to complete a new, smaller property, a bridging loan can be used for property downsizing.
  • Business Cash Flow: Small businesses may use a bridge loan to manage cash flow gaps, cover operating expenses, or take advantage of growth opportunities. 
  • Temporary Financing Needs: Individuals or businesses may require short-term financing for various reasons, such as paying tax bills, settling urgent debts, or funding unexpected expenses. 
  • Buy-to-Let Investments: Investors looking to buy a property to rent it out may use bridging loans to quickly secure the property, with plans to refinance using a longer-term mortgage. 
  • Land Purchase: Individuals or developers looking to purchase land for future development may use bridging loans to secure the land while they arrange more permanent financing for the project. 
  • Business Expansion: Growing businesses may need quick access to funds for expansion efforts, such as opening new locations or launching new products or services. 
  • Divorce Settlements: In divorce cases, where the sale of a jointly owned property is required, a bridging loan can help one party to buy out the other's share before the property is sold. 
  • Probate Cases: In inheriting property, beneficiaries can use bridging loans to access funds quickly while navigating the probate process. 
  • Property Flipping: Property investors who invest in property flipping – buying, renovating, and selling them quickly for a profit – often use bridging loans to fund the purchase and renovation stages. 
  • Gap Funding: Entrepreneurs or startups awaiting a larger investment or funding round may use a bridge loan to cover operational expenses until the funding arrives.
  • Refinancing a mortgage: When borrowers with an existing mortgage reach the end of their term and lack the funds to repay the original mortgage, a bridging loan can be used as a short-term method of repaying that mortgage.

Besides these specific uses, other circumstances might necessitate this form of financing; whether resolving cash flow issues during large-scale commercial ventures or breaking chains in residential transactions.

Who Uses Bridging Loans

Whilst lenders will tend to have their own specific criteria for borrowers they're willing to lend to, typically bridging loan customers will be the following...

  • A private individual, partnership or limited company.
  • Employed, self-employed or retired.
  • At least 18 years old.
  • Want to borrow at least £26k.
  • Own a property.
  • Live or have a registered address in the United Kingdom.
  • Have a defined exit strategy – usually the sale of current property or refinancing.

With so many uses for bridging loans, users can range from first-time buyers to pensioners, small businesses and limited companies, and property developers. There are also some lenders who have created a more diverse bridging product range to cater towards specific groups of people. For example, green bridging or Shariah bridging finance.

Credit Rating and Financial Stability

Your credit score indicates how effectively you have handled monetary commitments in the past. A high score could improve your chances of approval and possibly secure better interest rates. However, even if your credit history isn't perfect, don't despair - many specialist bridging lenders look beyond just numbers when assessing applications.

Lenders also examine applicants' overall financial stability by considering income sources and existing debts secured against properties or assets. They assess whether potential borrowers can comfortably manage monthly interest payments alongside regular outgoings.

Security: Existing Property or Asset
Bridging loans are generally secured loans requiring collateral - typically an existing property, which could be residential or commercial, depending on the lender's terms and conditions. The value of this asset greatly influences the offered loan amount; hence, sufficient equity is essential.

In case borrowers fail to meet repayments, charge agreements signed during application processes grant lenders legal rights over these assets, ensuring recovery options should things go wrong.

The Viability of Your Exit Strategy
An exit strategy refers to how you plan on repaying the bridging loan at the end of the term - something that lenders scrutinize closely while reviewing applications as it gives them insight into whether repayment deadlines will be met without issues arising from unforeseen circumstances like delays in property sales or securing long-term financing solutions such as buy-to-let mortgages.

Potential strategies might include selling another property outright after completion of refurbishment work (if used for development), refinancing with traditional mortgage products once personal finances improve, etc.

Each lender has different preferences regarding acceptable exit strategies, so ensure thorough research before applying.

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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Who Uses Bridging Loans FAQs

Do people still get bridging loans?

Absolutely. Bridging loans are a popular financing option for property investors, developers, and homeowners needing quick funds to secure properties or cover short-term cash flow gaps.

What can a bridging loan be used for?

A bridge loan can be used for almost any purpose. But they are often used to fund fast property purchases, refurbishments, auction buys, breaking chains in property transactions, and even catering to commercial cash needs.

Is it worth getting a bridging loan?

If you need swift finance for time-sensitive real estate deals or temporary liquidity issues, then yes. However, they should be carefully considered due to their higher costs compared to traditional mortgages.

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