A bridging loan is one that, as the name suggests, is used to cover a short period of time when funds are needed but not immediately available. What surprises many is that they can be used for a number of purposes.
The report Bridging Trends, mentioned in a May 2016 MortgageSolutions.co.uk article, indicates that the number one reason for taking out a bridging loan was due to mortgage delays. Though many of the processes that lenders use to complete the mortgage application are automated, it can take several weeks for the loan to be completed. Buyers who want to move into a new home but are frustrated at waiting for the mortgage can obtain a bridging loan to raise funds to complete the home purchase, then repay the bridging loan as soon as the mortgage funds are released.
A bridging loan can also help a person move into a new house while waiting for the sale of the old house to be finalised.
According to Bridging Trends, the second most popular reason for a bridging loan is for refurbishments. Often, these are used by landlords who buy low-priced property that needs a lot of repairs before tenants can move in. Many commercial mortgage lenders will not release the mortgage money on these properties until the necessary repairs have been completed. A bridging loan will provide the finance for the refurbishments and can be repaid when the mortgage has been completed.
Buying a house at auction
Some houses can be bought at an auction for a bargain price. At most auctions, the successful bidder will be required to pay a deposit of about 10% to secure the purchase. A bridging loan can be used for this.
Many auctioneers then insist that the full purchase price is paid within 28 days. If a standard or commercial mortgage is going to take more than 28 days, a bridging loan can be used to complete the purchase.
Non-property bridging loans
While most bridging loans for individuals and businesses are used for property purposes, they are flexible and can be used for a variety of other purposes.
A business may experience cash flow problems, especially if affected by seasonal markets. Some retail outlets have their biggest sales period leading up to Christmas, meaning summer sales may be low, but overheads and staff still need to be paid. A bridging loan can be used to make up for temporary periods of low cash flow until business picks up again.
Some businesses can purchase high-demand stock in bulk at discount prices. A bridging loan can be used to finance the purchase, then repaid when the stock has been sold.
Another use for commercial bridging loans is for the purchase of expensive equipment that is needed to increase production.
The exit strategy
All the examples above share one thing – they have what is known as a clear exit strategy. This means the lender knows when and how the bridging loan will be repaid.
All in all, a bridging loan is a flexible form of finance that has a number of uses by both individuals and businesses. Contact Ascot Mortgages today to learn more about its benefits.