Bridging loans: Nine scenarios where short-term finance can get you from A to Buy.

 In our recent blog From A to Buy: Ten frequently asked bridging finance questions, we explored some of the key questions about what bridging loans are, and the benefits and risks of using one for personal or commercial purchases.

Now we’ve covered the ‘what?’ and ‘why?’, it’s time to discuss the ‘who?’. Here are nine different scenarios where bridging loans could provide a short-term fix.

1. Flipping a property for profit

In 2023, online searches for ‘property flipping’ were up 29% compared with the previous year. This continued rise in popularity, inspired in part by TV shows like The Great House Giveaway and Homes Under the Hammer, highlights that more people are looking at property as an investment.

The process of flipping a property starts with buying a building with potential. These hidden gems can be snapped up at bargain prices but usually require work to be carried out before the property can be sold, ranging from light refurbishment to extensive renovation. The aim is to add value through these improvements and make a much higher return on investment overall.

In these circumstances, buyers don’t need long-term financial solutions like a mortgage. By using a bridging loan, they can finance the purchase and renovations, complete the work within a specified timeframe (typically months) and repay the loan once the upgraded property sells.

2. Repairing a broken property chain

In 2023, one in three (35%) house sales in the UK fell through after an offer was made.

A property chain is often reliant on needing the funds from the sale of an existing property to purchase the next home. A break in that chain, where a buyer pulls out or delays a deal, can be frustrating for the seller as they won’t be able to move until their sale is complete. By the time that happens, the property that the buyer is looking to move to, and has invested their time, dreams and hopes in to, may no longer be on the market.

A bridging loan can help individuals access the necessary funds to purchase their new home, repairing the chain break. It’ll also give them time to sell their existing property for the right price, without feeling pressured to sell quickly below market value.

PSA: Any outstanding payments on an existing mortgage will still need to be made until the property is sold.

• Does this situation sound familiar? Find out how to quickly fix a broken property chain with a bridging loan.

3. Waiting on guaranteed funds to come in

Similar to sellers experiencing a chain break, there are individuals looking to buy – but are in income limbo. Their money might not be tied up in property, but it could be in the form of an inheritance, divorce settlement, income payment or another investment asset that they are expecting to come to fruition.

For example, inheritance and divorce processes can take several months to complete, but circumstances may mean that the individual needs to move to a new property quickly, or an opportunity becomes available that cannot wait.

A bridging loan allows someone to buy the property now and repay the loan once they receive the expected funds or secure longer term finance.

4. Improving the Energy Performance Certificate rating and energy efficiency of a property

Massive amounts of energy are used each year to heat UK homes and businesses. A lot of energy is being lost due to insufficient insulation, single pane window glazing and inefficient heating and lighting systems. This is not only adding unnecessary cost to utility bills, but adding harmful carbon emissions in to the environment.

Currently, over 8 million homes in England that already have an EPC rating fall below band C. These houses are classed as being low (poor) energy efficient homes, according to the government. One contributing factor is that over 38% of the UK’s housing stock was built before 1946, with poorer building practices and the effects of time leading to lower EPC scores compared to newer builds.

A bridging loan would allow a property owner to fund improvements, such as adding wall and ceiling insulation or installing heat pumps or solar panels, to raise their EPC rating and reduce energy costs. In addition to highlighting energy efficiency, a high EPC rating can also add considerable value to a property and be a positive contributing factor for potential buyers.

• If you’d like to find out more about EPCs, our EPC Hub for Homeowners and Landlords are a great place to start. You can find out the benefits of upgrading your EPC rating alongside answers to some of your frequently asked questions on the subject.

5. Refinancing and managing cash flow

A bridging loan can be used if an individual or business has existing finance on a property and needs to quickly replace it. For example, the existing finance could be about to run out before repayment is possible, resulting in costly penalties.

In a business scenario, there may be times when owners need to raise capital quickly. For example, a bridging loan can help to quickly pay off an unexpected tax bill, buy raw materials to fulfil a large order or take advantage of a business opportunity.

6. Renovating a residence for rental

Whilst flipping a property can see a quick return on an investment, many individuals are looking for a longer term investment. Preparing a property for rental allows landlords to keep an appreciating asset in their portfolio and receive a monthly income from tenants. In most cases, the rent generated will be used to cover any mortgage payments on the property.

Using a bridging loan to purchase and renovate the rental property serves two main purposes. Firstly, landlords can quickly purchase and renovate their property so it’s in a habitable shape for tenants to move, creating income. It also allows landlords to address any problems with the building that a lender might have, like structural issues, making it easier to get a long term Buy to Let mortgage at a lower rate.

• Are you a landlord? Find out how to use bridging finance to your advantage.

7. Capitalising quickly on an opportunity to purchase property or land

There may be times when successful businesses, with plenty of capital, may find that they have most of their funds locked into non-liquid assets such as equipment, real estate, vehicles and stock. In the time it takes to convert these assets into available cash, the opportunity may be gone, especially if it’s time limited or there’s fierce competition.

With a bridging loan, the business can quickly secure the property or land they need to meet their growth ambitions, paying back the loan and accrued interest once assets are sold or expected profits are generated.

Additionally, having the ability to act as a cash buyer is advantageous when a vendor needs a quick sale and is prepared to sell the property or land at a discount.

8. Renovating a business property before trading or conducting an extensive refurbishment

If you’ve ever heard the phrase ‘it takes money to make money’, you’ll understand that businesses need to periodically invest in order to continue to generate income. This could be buying and installing the vital infrastructure needed to start trading, such as factory machinery, or completing a refurbishment on an ageing restaurant or shop, for example.

When the business doesn’t have funds upfront to pay for the necessary improvements, they can use a bridging loan to complete them. Once they start trading, the money generated can be used to repay the loan and any accrued interest.

9. Purchasing at auction

The important figure to remember when talking about buying a property at auction is 28 days.

That’s the amount of time that the winning bidder, who must pay a 10% deposit on the day, has to complete the purchase. Even with a standard personal mortgage or Buy to Let mortgage, the process can take between four to six weeks before an offer is approved with some high street lenders. The buyer would almost certainly miss the auctioneer’s deadline, losing their 10% deposit and potentially incurring other costs from the auction house and seller.

But, to make things more complicated, many properties sold at auction may not qualify for long term finance as they may not be in a good enough condition to meet lending criteria. For example, auction properties may have structural issues, damp or missing facilities such as a bathroom or kitchen, making them ‘unmortgageable’ in the eyes of some traditional lenders.

With a bridging loan, the buyer can secure the property before the 28-day completion deadline, ensuring they don’t miss out on their opportunity. Once purchased, they can renovate the property up to the standard required to either secure long term finance or to sell the property for profit.

What do you need to be aware of before getting a bridging loan?

Please bear in mind that bridging loans are intended to be used as a short-term finance solution. You will need to repay the full loan and the accrued interest within a 12-month period so it is important to know what your long term finance strategy will be (e.g. selling or renting the property, using income from commercial activities, using income from an inheritance or divorce).

Some bridging loans don’t have early repayment charges associated. This means that being able to pay your full loan back after nine months, for example, will save you paying an additional three months’ worth of interest compared to waiting the full year to repay.

Bridging loans are typically offered at a higher interest rate than other longer term solutions. You should research these options as well as bridging loans to see if they could more suitable and cost effective for you overall.

If you cannot repay your bridging loan within the agreed term and cannot arrange alternative financing with your lender, any property used as security, including your home, may be at risk of repossession.

Need more information on bridging loans? Check out our Buy to Let or Bridging: Which auction finance option is right for you? and From A to Buy: Ten frequently asked bridging finance questions articles.

Do any of these nine scenarios sound familiar? If so, and you think that a bridging loan could be the solution for you, get in touch with our team.

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If you’re a broker, you can find more information on how bridging loans could help your customers here.