Bridging Loans: What they are and how they work

Bridging loans are short-term loans designed for those properties or borrowers that wouldn’t be able to obtain longer-term finance. They can provide a powerful option for property investors who want to take advantage of opportunities that they would otherwise miss due to tight deadlines.

This guide explores the basics of bridging loans, giving you the key information about this specialised form of property finance. It will also discuss opportunities that bridging loans can enable you to take advantage of, helping you make informed decisions about this specialised form of finance.

What are bridging loans?

Bridging loans are short-term financing solutions secured against property, designed to provide capital to borrowers who require quick access to funds. They are highly suitable when time is of the essence, such as capitalising on opportunities with tight deadlines or purchasing property via auction. Essentially, bridging loans give borrowers an option of financing that meets the need for immediate capital when longer-term loans may not be available in time.

Alongside speed, a bridging loan’s other main defining characteristic is flexibility. While they are often used for property acquisitions, bridging loans can also be used to raise capital, exit a development loan, fund property refurbishments, and more.

However, the benefits of bridging loans tend to come with higher interest rates than mainstream loans. This higher interest is due to their short-term nature, the speed at which loans progress and the increased risk lenders take on by offering bridging loans. They are not intended to be a long-term financing solution but rather a tactical tool, either for those who need immediate capital to take advantage of opportunities or who cannot obtain long-term finance due to their circumstances or a property’s condition.

How do bridging loans work?

Bridging loans are relatively straightforward, although they require careful consideration of various factors. When a borrower applies for a bridging loan, KSEYE will evaluate the security property(s) (which can include the asset being acquired), the borrower’s financial situation, and the proposed way of repaying the loan, such as a refinancing onto a longer-term loan or the sale of an asset.

Following this initial evaluation, KSEYE will issue a set of terms, offering an indicative interest rate and the % of the property value we will lend (known as Loan to Value, or LTV). If a borrower proceeds to a full application, we will instruct a valuation on the property, and if this comes back as expected, there are only the legal steps to go until the loan is complete and we provide the desired funds.

The repayment structure of bridging loans is usually set for a short duration, typically ranging between 3 and 12 months. Borrowers have to repay the full amount of the loan, including interest, by the end of the term. Having a solid plan to repay the loan is vital and forms a key part of a bridging loan application.

Advantages of bridging loans

Bridging loans offer several advantages that make them an attractive financing option. One of the most significant benefits is the speed of funding. Mainstream lenders may take months to approve a loan. By contrast, bridging loans provide funds much faster, even within days, in exceptional circumstances. This speed allows borrowers to act quickly on investment opportunities with strict deadlines, which they would otherwise miss out on.

Another advantage is the flexibility of bridging loans. Versatility can be a game-changer for those navigating complex financial situations, such as having adverse credit issues which would prevent them from obtaining mainstream finance. This flexibility can also extend to the property itself. For example, an investor might use a bridging loan to purchase a dilapidated property in a desirable location and renovate it before either selling it for a profit or refinancing it with a buy-to-let mortgage.

Bridging loans can also be structured to fit a borrower’s specific needs. With varying repayment terms and interest options, borrowers can choose a repayment option that aligns with their financial strategy. This can enhance the overall financial management of a property investment or other projects, giving borrowers greater control. By understanding these advantages, potential borrowers can better assess how bridging loans might fit into their broader financial plans.

To learn more about bridging loans, discuss them with your property broker or contact KSEYE today.