The Changing Face of Bridging Loans

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Property is arguably the most imperfect asset on the market. High transaction costs, a lack of perfect information and no two properties are the same.

With many people viewing their homes as their castle, ownership levels are relatively high in the UK and for the majority of people buying a home is usually the biggest investment you will ever make.

Originally, a bridging loan’s primary use was to allow homeowners to go through with a move, even if your sale falls through or is delayed, avoiding fees and heartache. However, as interest in bridging loan has increased, we have seen the market expand rapidly and mature past the point of simply property.

So what can I use a bridging loan for?

The answer to this question is; anything. If you have equity in assets including land (with or without planning permission), residential property, business property and buy-to-let property, you can often loan up to £1 million.

The beauty of bridging loans is that they are short term, with most lenders looking for the loan to be paid back within a year. This obviously doesn’t make it an option for everybody and therefore it is important to assess your situation to ensure you can repay and that it is the best way of borrowing the money.

Property

Property still makes up the biggest demand for bridging loans. As credit from the banks has dried up, we have seen the end of the 120% mortgage. Interest rates are at an all-time low and with the stock market not showing any sizable returns, leaving investors with poor returns from their savings, and looking to invest elsewhere.

Pre-recession, the mortgage market catered for this demand by offering a wide range of financial tools, including mortgages that let you borrow on equity of the expected increase in value of the property. This allowed anyone who had a stable job to get onto the property market, whilst simultaneously creating a finance bubble that looked destined to explode, and as we found out, it did.

Post-recession, deposits are sky high preventing a lot of first time buyers from joining the property market, even those who would be fully able to take on such a financial responsibility. This has encouraged the rental market to swell, increasing rental prices and creating a new market of investors looking to join the buy-to-let market.

Bridging loans were at one time used as a temporary measure to bridge a gap in funding; now more flexible timescales and terms can be requested. This has allowed landlords and property developers to buy a property that wouldn’t otherwise qualify for a mortgage.

For example, if the property is in a state of disrepair, a bridging loan allows you the capital required to buy it and renovate, in order to secure longer term finance such as a buy-to-let mortgage or to simply resell at a profit.

Bridging Loans and Business

As the bridging loans market has matured, businesses have started using them in certain scenarios. It should be stated that bridging finance is often not the right answer for your business. They are a short term option that can assist in certain scenarios, and shouldn’t be viewed as a way to borrow money when repayment looks unlikely.

However, if you are in a seasonal industry where the majority of your profits are made in a certain time frame, and are looking to buy more stock before your busy periods, bridging loans may be the answer for you. This often requires the business owner to use their personal assets such as a property as equity. The money can then be used for any reasonable business expenditure with repayment terms often between 1 month and a year.

Property developers have had a lot of success utilising bridging loans. There are case studies looking at how property development companies have bought old warehouses and by borrowing the money to purchase and renovate, they have sold at a profit just over a year later.

A big example of this is Citu who have developed an eco-friendly block of flats by renovating an old workers hostel on the outskirts of Leeds city centre. They now successfully make rental and sale income, showing that if you can get your project done on time and on budget, bridging loans can be a very powerful financial tool.

Are Bridging Loans for me?

The bridging finance market has shown real growth over the last year, and shows no sight on slowing down. They are a perfect way to free equity in your assets for business expenditure if you have temporary cash flow issues or would like another option to factoring your invoices.

Although they are not ideal for every situation, as the market becomes more competitive, and Bank of England base rates at an all-time low, you are likely to find a great bridging loan dea