Bridging finance might sound like complex financial jargon, but it’s actually a practical solution that helps people navigate property transactions that don’t quite fit the standard mortgage model. If you’ve ever found yourself in a situation where timing is critical or traditional financing options aren’t viable, bridging finance could be the answer you’re looking for.
Having a basic understanding of bridging finance – and where and when it can help – also helps if you’re one of those people who likes to dream big, as it can help to make the seemingly impossible possible.
What is bridging finance?
“A bridging loan is a short-term interest-only loan, which is typically used to bridge together two scenarios that don’t quite fit,” explains Laura Toke, Bridging Relationship Director at SPF. “You might use bridging finance for speed, or if you’re waiting for the sale of your property. It’s a quick solution to enable you to get from A to B while using your property as security for the loan.” Unlike standard mortgages which typically run for 25 to 30 years and take into account your ability to make monthly repayments, bridging loans are designed to be short-term solutions, usually with a maximum term of 12 months for regulated loans (those secured against your home). They typically also require a larger deposit, or offer a much lower loan-to-value (LTV) than a standard mortgage. These fundamental differences mean they serve an entirely different purpose in the property market.
A regulated bridging loan is overseen by the Financial Conduct Authority and s typically used for residential purchases or renovations, where the borrower will live in the property. Unregulated bridging loans are not subject to the same regulatory scrutiny and are commonly used for commercial purposes, investment properties or situations where the borrower won’t be living in the property. SPF can assist with both.
When would you need bridging finance?
There are several instances when bridging finance can help, and these include:
- Breaking the property chain – One of the most common uses for bridging finance is when a property chain breaks down, which can be known as either a chain break or a non-simultaneous sale and purchase. “For example, you’re selling your current home and buying a new one, and you’re trying to do the two transactions simultaneously. However, if at the last minute your buyer pulls out and you still need to complete on your onward purchase a bridging loan would cover the gap,” says Laura. In this scenario, a bridging loan secured against the property you’re selling provides the funds needed to proceed with your purchase, creating a financial ‘bridge’ until your property sells. When the sale goes through, the bridging loan would be repaid from the proceeds, and you would refinance with a standard mortgage.
- Auction purchases – “Another really common reason to use bridging loans is purchasing at auction,” Laura explains. “Typically, when you buy a property at auction, you have a deadline of 20 working days to complete on that purchase, and those timeframes aren’t normally feasible for a mainstream mortgage lender.” The speed and flexibility of bridging finance make it ideal for auction purchases, where traditional mortgage providers simply can’t work within the tight timeframes. A 10% cash deposit is required to purchase the property on the day of the auction and the bridging loan is used to meet the 20-day deadline. In time, the bridging loan is then repaid with a standard mortgage.
- Uninhabitable properties – “Bridging lenders are able to lend against uninhabitable properties,” says Laura. “Even if it doesn’t have a working kitchen or a working bathroom, which are requirements for standard mortgages, the lender can still lend because the bridging loan is merely in place while refurbishments and renovations are carried out.” This makes bridging finance particularly useful for property developers or those purchasing properties that need substantial renovation before they can be mortgaged conventionally, and ties into the idea above of helping those who like to dream big with their property ambitions.
- Downsizing solutions for retirees – “A client might be living in a £3 million house that’s now too big for them as their kids have moved out,” says Laura. “They want to downsize to a £1.5 million house, but don’t have the cash available to make the purchase.” While retired homeowners might not have the regular income to support a traditional mortgage, they can use a bridging loan to purchase their new home before selling their current property, thereby making the move less stressful. It also removes the time pressure and gives them breathing space to achieve the best possible price for their former home.
How does bridging finance work?
Unlike traditional mortgages where you make monthly repayments, bridging loans typically work on a ‘rolled-up’ interest basis. This means you don’t make monthly payments during the term of the loan; instead, you repay what you borrowed plus the accrued interest when you exit the loan. “The difference between a mainstream mortgage and a bridging loan is with a mainstream mortgage the interest is charged annually and you pay it monthly,” explains Laura. “With a bridging loan, the interest is charged monthly, but typically the interest payments are rolled up monthly into one payment when you redeem the loan.” This structure makes bridging finance particularly suitable for situations where cash flow is temporarily restricted, such as during a property renovation.
The exit strategy: A critical component
The most crucial aspect of bridging finance is having a clear exit strategy, i.e. how you’re going to repay the loan at the end of the term. “The main thing to be cautious with is ensuring that your exit route for the loan stacks up,” says Laura. “The lenders will obviously do their own due diligence and underwriting on this as well to ensure that the loan can be repaid. This is the main eligibility criteria; as mentioned earlier bridging finance isn’t based on your income and ability to make monthly repayments.” Common exit strategies to repay the loan include selling the property that was used as security, refinancing to a traditional mortgage once a property is renovated, or selling another asset.
Is bridging finance right for you?
Bridging finance provides flexibility and solutions that traditional mortgages simply can’t offer. However, it’s important to work with a specialist broker who can guide you through the process and ensure it’s appropriate for your circumstances. “Not all brokers will advise on bridging finance, but they should be able to refer you to someone who does, like us at SPF,” says Laura. “And there’s no harm in getting a no-obligation quotation.” With the right guidance, bridging finance can transform potentially stressful property scenarios into manageable transitions, giving you the flexibility and time you need to achieve your property goals. “The thing about bridging is we’re looking at the financing from an asset-based lens rather than an income-based one,” concludes Laura. “It’s about knowing your options and finding creative solutions.”
Talk to our expert short-term finance team today to see how they can help you.
