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A guide to short-term finance: What are bridging loans and what are they used for?

Typically used as a way to mend a broken link in a housing chain, in the past bridging loans have been principally used to ‘bridge’ the gap between a house sale and completion.

However, they are also used for people buying at auction, to meet strict deadlines - usually of 28 days - for people wanting to carry out refurbishments to boost the value of their homes or for numerous business purposes.

In more recent years, the market has seen a broader number of uses for short-term loans as their popularity has increased. For example, many commercial premises are now being converted into residential houses or flats, because of the expansion of permitted development rights, and bridging loans can be used in the initial stages of the conversion with longer term funding provided once the building project has started.

Short-term finance can also be used to buy new equipment, to build up stocks ahead of an expected rush on seasonal orders, or for buying shares in another business.

Daniel Owen-Parr, our head of professional sector and auction, said: "This type of finance has come a long way since it was first used in the 1960s to fix broken housing chains.

"Short-term finance is becoming increasingly popular, mainly because of its speed and flexibility means that borrowers can quickly buy the home that they want, or seize a business opportunity ahead of their competition."

Daniel outlined examples of various scenarios your clients may find themselves in, where they could use a bridging loan:

To buy a dream home

"Imagine they've found the perfect new-build home, and the builder is willing to sell it at a discount – but only if they exchange contracts within three weeks and complete within four.

"With such a tight timeframe, and a chain on the sale of their existing property, they might end up missing out. However they could secure the new property with a short-term loan, provided they have savings to cover any Stamp Duty, conveyancing fees, legal and moving expenses.

"This loan would last typically up to 12 months, and they'd have no monthly repayments to make – so wouldn't be paying two mortgages at the same time. Instead, the interest is 'rolled up' and repaid with the initial loan – which they can do whenever the sale of their old home is complete, and they receive the funds from the vendor.

"As their home is involved, the loan would be regulated by the Financial Conduct Authority (FCA)."

To secure an investment property at auction

"If you buy at auction, you have to put down a 10% deposit there and then – and you could lose it all if you don't complete within 28 days.

"Buying a former commercial unit – for instance, an old bank building at auction – to turn into flats could represent a profitable venture.

"But if they then find themselves let down by their usual finance provider, because the building is classed as a non-standard property, they'd have to act fast to arrange alternative funding.

"Traditional mortgages can take far longer than four weeks to complete, but they could turn to a bridging loan to both secure the purchase*, and complete the conversion."

To buy a new business premises

"Imagine your client owns several units on a business park, and are considering investing in another. One of the neighbours needs to clear a tax bill, and quickly, so they're willing to sell their unit to raise the funds. The catch? They need the cash within three weeks.

"If your client decided to invest in the unit, their bank may be unable to provide the money needed at such a short timescale. They could take out a bridging loan to cover the purchase cost, secured against the other units on the business park that you already own*. This satisfies the vendor's timescales, and gives their bank time to arrange longer-term borrowing."

* Your home may be repossessed if you do not keep up repayments on your property.

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