Time is money. Therefore, waiting several weeks for a mortgage from a traditional lender to be approved can be both highly stressful and may mean you miss out on the investment property you’re looking to secure. An alternative is considering short-term bridging loans.
As the name implies, a bridging loan ‘bridges the gap’ between arranging a long-term finance and property purchase. In particular, short-term bridging loans are often used by borrowers who want to snap up a property and need funds quickly.
People choose bridging finance for various reasons. In this post, we will be providing an overview of the main bridging loan uses for homeowners, developers, and property investors.
1. Speedy property finance process
Short-term bridging loans are indeed fast, and this is one of the major reasons people often select this kind of finance. A standard mortgage approval process often takes weeks or even months. This can be quite frustrating, especially when completing a property investment with a tight deadline. By comparison, a short-term bridging loan can often be within your account within a matter of days.
2. Straight-up investment
Domestic and offshore property investors often turn to a short-term bridging loan to provide the deposit for a residential or commercial investment property. The COVID-19 pandemic has spiked the purchase of commercial properties, which, in many cases, have been snapped up for a steal. Interestingly, the commercial property tenants have increasingly been purchasing their commercial premises.
3. Funding refurbishment projects or conversions
A short-term bridging loan is commonly used by investors to quickly complete renovations to increase the value of the property and enhance selling the property for a profit. Investors often favor a short-term bridging loan as quick access to funds means that work can start right away.
There are several ways that investors utilize a short-term bridging loan.
Properties that are either damaged or neglected often hold great potential for yield increase. Damaged properties are often undervalued, which can be ideal for property investors with a keen eye for renovation projects. This may be a complete rebuild or a light refurbishment.
Increasingly, many investors are doing ‘conversion developments’ to accommodate the need for more people’s work-from-home requirements – which is becoming increasingly attractive to prospective purchasers.
4. Business capital
Short-term bridging loans can be used for personal or business purchases. In addition to investment property purchase and renovation, a short-term bridging loan is often utilized to support businesses:
- Start a new business project
- Buy a new commercial establishment like an office building or a warehouse
- Extend and grow the existing company
- Helping to smooth out operational costs such as wages, tax bills, office equipment purchases, marketing or securing inventory
How bridging loans work
Here’s a quick overview of the mechanics of a typical bridging loan:
- The loan credit company gives the funds to purchase the new property and takes over the loan of the existing property. They can also restructure your loan so that the term of the original loan can be shortened. The credit company may also require you to pay some fees.
- The money you borrowed from the credit company is called the ‘peak debt.’ It’s the total amount of money that you, as a borrower, owe to the lender, the balance on the existing loan of your property and the new loan amount that will be used to buy the new property.
- Repayments may change during the term of your loan. That’s why you must check with the credit company for their payment conditions.
- Upon selling your existing property, the remaining balance of your loan will be now called the ‘end debt.’ This means that the payment of your existing property will be subtracted from your principal loan amount. Your end debt now constitutes the principal amount of your bridging loan.
Key takeaway
Short-term bridging loans can be a great option if you need funds quickly for personal or business purchases. This type of loan can be suitable for situations where you need access to quick funds for a short period of time. If you want to fully understand the benefits this type of loan can give you, make sure to consult with a reputable lender or mortgage broker.