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  • Marc Turner

Decoding the Process: How Does Bridging Finance Work?

How does bridging finance work? It's a question that could stump even the most seasoned property investors.

In reality, it's an invaluable tool when you're looking to secure a property deal swiftly and smoothly. However, the concept of "how does bridging finance work?" remains an enigma to many.

The truth is, understanding how bridging finance works could be your ticket to unlocking lucrative real estate opportunities.

So let’s dive into the world of bridging finance once more and unravel its intricacies together!

A tree growing in a glass full of coins

How does bridging finance work? Discover the perfect solution for your needs.

Understanding Bridging Finance

Bridging finance, often referred to as a bridge loan, is a short-term financing solution designed for property investors and high-net-worth individuals.

This type of specialist finance enables you to borrow money swiftly over shorter periods than traditional loans offered by high-street banks.

The Basics: How Does Bridging Finance Work?

In essence, bridging loans work similarly to other secured loans - they are usually backed by real estate assets or land.

If the borrower defaults on their repayments, the charge lender has the right to take ownership of this asset to recoup their losses.

Bridging finance can be categorised into two types: open bridging loans and closed bridging loans.

  1. An Open Bridge loan is typically used when there's no fixed repayment date set yet due to their flexibility; ideally, if you're waiting for your property to sell proceeds but haven't exchanged contracts yet.

  2. A Closed Bridge loan, conversely, offers less flexible terms but comes with lower interest rates because it involves setting an exact end date based upon known circumstances, such as completing a buy-to-let mortgage application or finalising equity released from another source like selling off some investments.

Purpose of Bridging Loans Explained:

  • Fill the gap between buying one home before selling another and avoiding stressful moving day clashes.

  • Rapidly securing properties at auction where conventional mortgages won't get approved quickly enough.

The costs associated with these kinds of lending solutions include arranging fees charged upfront (usually 1%-2% amount borrowed), valuation fees paid directly to lenders offering bridging services plus monthly payments covering ongoing interest charges.

In our next section, we'll delve deeper into how beneficial these financial products could potentially be depending on individual needs and situations.

Benefits of Bridging Finance

If you're a high-net-worth individual or property investor, bridging finance can be a flexible financial solution that propels your ventures forward.

Bridging Loans for Rapid Property Purchase

The UK's real estate market is moving quickly, and waiting for traditional lenders like high street banks can cause missed opportunities. This is where bridging loans come into play. They provide fast access to funds enabling immediate purchase while securing long-term financing such as a buy-to-let mortgage.

Funding Refurbishments with Bridge Loans

A common use of bridge loans in the property sector is funding refurbishment projects. This type of specialist financing allows investors to make necessary improvements before selling or renting out properties at higher rates than initially purchased, thus increasing their return on investment (ROI).

Lending Flexibility & Speedy Process

In contrast to personal loan applications from mainstream lenders, which consider credit history extensively, alternative lenders offer longer repayment terms and focus more on the viability of your project when evaluating eligibility. The process tends to be quicker too - sometimes within 48 hours.

  • No need for exchange contracts: Open bridging loans are an option if you haven't yet sold your existing property but want to secure another one immediately.

  • Easier approval despite bad credit: If traditional lending avenues to borrow money aren't available due to poor credit scores, this form of secured loan may still be viable since it's based primarily on asset value rather than just the applicant's past financial behaviour.

  • Straightforward exit strategy: Closed bridge loans work best when there's a fixed repayment date - typically after sale proceeds have been received from another property outright owned by the borrower.

The benefits extend beyond these points but remember each lender has its own criteria including valuation fees, set-up fees, early repayment charges and interest rates, so always compare options thoroughly beforehand.


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