Bridging finance is becoming increasingly popular. According to the latest data from Bridging Trends, this kind of lending rose to an all-time high in the 3rd quarter of 2022, which saw £214.7m lent. But using this kind of short-term finance is still comparatively unusual – that’s why you need specialist lawyers with plenty of experience of bridging finance conveyancing to make sure your transaction go smoothly.
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What is a bridging loan?
Whether it’s to help buy your dream home or your next property investment, bridging loans are a convenient way to finance a residential or commercial property purchase when funds are required quickly or where you cannot secure a conventional mortgage. They are intended to be a short-term fix, to literally ‘bridge a gap’ in your finances.
The term of a bridging loan is much shorter than a conventional mortgage, and the rate of interest charged is usually much higher than on other types of lending. Bridging loans are also secured loans, meaning that they are secured against an asset – usually a property – which you risk losing if you cannot repay the loan in time.
4 common uses of bridging finance
People choose to use bridging finance for several reasons. They may want to buy a new home before their current one has been sold, buy a property over which they can’t secure a conventional mortgage – because it is currently uninhabitable, for example – or purchase a property at auction. And they are also they are also regularly used by property investors who need to move quickly.
1. Avoiding the breakdown of your conveyancing chain
This appears to be the most common use of bridging finance. According to statistics from Bridging Trends, preventing a break in the conveyancing chain became the most popular usage of a bridging loan in 2022, Q3 with 22% of total transactions.
If you’re looking to buy a property but don’t want to risk breaking the conveyancing chain, a bridging loan could be the answer.
Bridging is often used to purchase property before funds become available – perhaps before monies from the sale of existing property are released. And once that happens, the money from the sale can be used to pay back the bridge loan.
2. Planning permission
Bridging finance is one of the most popular ways used by property investors to buy land or property with development opportunities requiring planning permission, where other sorts of funding may not be available. And if permission is granted, then development finance is commonly used to fund construction costs.
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3. Buying property at auction
For those looking to acquire property at auction, speed is a necessity It is usually necessary to pay the full purchase price within 28 days. That is routinely what you commit yourself to when the hammer goes down and your bid is successful. This can be really difficult for prospective buyers who are not cash buyers – because the process of securing a mortgage is often painfully slow, and usually takes more than just 28 days.
So these kind of loans are very useful when buying at auction to bridge this gap and to ensure buyers are able to snap up bargains when they arise
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4. Buying dilapidated or unusual property
Many property investors, developers and individuals often seek out unusual, dilapidated or run-down buildings that they can convert or upgrade. This particular useful for those property investors who purchase a below-market-value property that requires work using what is known as the “BRRR” (buy, refurbish, refinance, rent) strategy.
A bridging loan in the circumstances, allows them to add value to the property and then refinance using a more conventional mortgage before selling or renting the property out to tenants. As they have added value to the property, when it comes to refinancing the property, the investor can often refinance at the higher value, allowing them to recycle much if not all of their initial capital and move on to the next project.
These types of properties are often considered unhabitable, and many high street lenders will not provide a mortgage for them due to the lack of security they provide.
But, don’t forget that you will still need to offer alternative security for the loan.
Your bridging loan – the importance of having a well thought out exit plan
To secure a bridging loan, your lender will insist that have a watertight ‘exit plan’.
This plan should detail how you intend to repay the loan within the relevant time frame. Lenders will carefully examine your exit plan when considering your application and deciding how much to lend you. If they’re not satisfied your exit plan is good enough, they simply won’t lend.
A good conveyancing exit plan may enable you to raise funds in circumstances which might otherwise prevent you from borrowing – if, for example, you have a bad credit score or cannot meet affordability criteria.
In the context of property purchases, a standard exit plan is to repay the loan with the proceeds of sale of your current home or the renovated property. In this example, however, you would need to be sure that the market conditions are favourable to a quick sale and that the sale price will cover the outstanding amount of your bridging loan at the time of repayment. A sluggish property market or one where property values are dipping can prove a disaster if you’ve used bridging.
Bridging finance pros and cons
- Bridging finance advantages
♦ lending decisions are usually made quickly, often much quicker than conventional mortgages – so these types of loans allow you to gain quick access to substantial funds
♦ potentially larger sums to borrow due to it being secured against property
♦ the choice of fixed or variable interest and open-ended or closed loan terms
- Bridging finance disadvantages
♦ interest rates tend to be higher than other types of loan
♦ there are usually fees such as exit fees, arrangement fees and an additional set of conveyancing legal fees to pay
♦ like any other mortgage related products, your home or property investment is at risk if you cannot keep up with repayments.
What do bridging finance conveyancing lawyers do?
Bridging loan providers often insist that you take independent advice from bridging loan lawyers before approving your application. Your conveyancing lawyer will advise on the terms of your bridging loan, your repayment obligations, any relevant conditions and the consequences of failing to repay the loan in time. They will also ensure that you are aware of the costs associated with your bridging loan, which can often be higher than those associated with other forms of borrowing.
A lender may, for example, charge a fee to process your application, a fee when you draw down the funds and an exit fee upon repayment of the loan.
Bridging finance is often required urgently, and bridging loan lawyers are adept at working under significant time pressure to prepare comprehensive, watertight documentation that gives your application the best chance of success.
What is bridging finance conveyancing?
The issues raised by purchasing a property with a bridging loan can differ from those which commonly arise in other conveyancing transactions. Much of the documentation involved is also unique to bridging loan transactions. For example, the bridging loan lender will take a charge over any property you use as security for the loan.
If you already have a mortgage over that property, your existing lender will usually need to consent to the registration of this additional charge. Lawyers specialising in bridging finance conveyancing will help you deal with this second charge requirement and all other aspects of the process involved in buying a property with a bridging loan.
If you purchase a property using bridging finance before selling your existing home, you will own two properties for a while. This can have tax implications since tax reliefs that apply to your main residence may not similarly apply to your other property. You might also need to pay a higher rate of stamp duty. Whilst this can be refunded in certain circumstances, its impact on your finances should be considered before you proceed. Bridging finance conveyancing lawyers will review any tax, or other, consequences of your purchase and advise accordingly.
Your bridging loan – the importance of having a specialist lawyer on board
Instructing a lawyer with plenty of experience in bridging finance conveyancing is the best, most cost-effective way to understand the implications of bridging finance and ensure a smooth, swift property transaction.
But make sure your lawyer has plenty of experience of bridging loans. Many, possibly most, conveyancing lawyers rarely handle bridging – and some can really struggle to provide the level of service you need as a result.