Bridging Finance
What is Bridging Finance?
If you’re unfamiliar with bridging finance, here’s a brief overview of what it entails and how it operates.
What is a Bridging Loan?
As the name implies, a bridging loan is designed to bridge the gap between purchasing a property and settling the loan, either through the sale of a property, refinancing with a mortgage, or a combination of both. It provides short-term financial support to ensure transactions proceed smoothly.
Typically, bridging loans are arranged over a 12-month term with no early repayment penalties, aside from up to three months’ interest payments (this can vary by lender). If you choose to repay within the first three months of drawing down the loan, you would be responsible for paying the full interest for that period. After the initial three months, repayments are based on the duration of the loan.
Many lenders offer the option to “roll up” interest, meaning the interest is added to the loan each month and repaid in full, along with the original loan amount, at the end of the term. This allows you to avoid ongoing monthly payments during the term. However, the rolled-up interest counts towards the lender’s maximum loan-to-value (LTV) ratio, which typically ranges from 70-75% of the property’s value.
When assessing a bridging loan application, lenders focus primarily on two factors: the value of the assets being used as security and the exit strategy for repaying the loan. As long as there is a clear plan in place—either through the sale of a property or securing a standard mortgage to cover any shortfall—the lender is likely to approve the application.
Bridging finance can be used for a variety of purposes, such as purchasing a new property while waiting for the sale of an existing one to complete, or acquiring a property in need of refurbishment that may not initially qualify for a standard mortgage.