If you are a developer, investor, or someone simply looking to purchase your first property and don’t currently have the funds to complete the project, you’ll need a cash injection. For some people, typical financing may not be an option due to their credit history or the condition of the property, so an alternative may be necessary.
This is where bridging loans become a must. At Bridging Finance Solutions, we have seen firsthand how the bridging loan process has led a project to completion much faster than a typical loan would, and in this guide, we will outline how bridging loans work and how you can apply for one today.
What is a Bridging Loan?
If you’re new to property finance and want bridging loans explained simply, you’re in the right place. A bridging loan is a short-term loan that is designed to bridge the gap between the purchase, development and then the sale of an existing property. A common use of a bridging loan is when someone has found a new property and risks missing out on the purchase due to failing to sell their current property. While they wait to sell their property, they may take out a bridging loan to provide the cash they need until they complete the sale, and once the sale is complete, they will then repay the loan.
Bridging loans rarely have terms longer than a year, which is why they are such a popular solution for those who need a fast, short-term solution. For a more in-depth look at the product, our guide on what is a bridging loan UK covers seven things most borrowers get wrong.
How Do Bridging Loans Work? The Step-by-Step Process
Understanding bridging finance starts with knowing what to expect from the process. If you need fast finance and are considering applying for a bridging loan, you can expect the following steps before funds are released.
Initial Enquiry and Broker Consultation
At the point of initial enquiry, the borrower contacts the lender with details of the property, the loan amount, and the exit strategy they intend to follow. This initial conversation will give both parties an idea of bridging loan cost, whether they are suited to working together, and whether the broker believes they can financially support the project at hand.
Terms Agreed in Principle
Following the initial enquiry, the lender contacts the borrower. Using the provided information, they usually send indicative terms within 24-48 hours. These include the loan-to-value (LTV), interest rate, and estimated fees. While not final, these details give the borrower a clear understanding before committing to and going through the effort of submitting a formal application.
Formal Application and Documentation
If a borrower chooses to proceed with the loan, a formal application is then submitted. This application should include key documentation, such as the applicant’s ID, proof of address, an exit strategy, and detailed information about the property being used as collateral, along with any planning permission that you have acquired.
Property Valuation
The lender will then arrange for an accredited surveyor to assess the property serving as security. For straightforward cases involving residential properties, desktop or drive-by valuations might be used to speed up the process. The valuation determines the maximum loan amount the lender can provide.
Legal Work Begins
Once all the necessary checks and valuations have been thoroughly completed, both parties are required to contact their respective solicitors to discuss the finding
s, clarify any remaining issues, and proceed with the next steps in the legal process.
Loan Offer Issued
With the valuation complete and all legal checks in order, the bridging lender will issue a formal legal offer stating the amount they are willing to lend and the repayment period. The borrower will then review the contract and, if satisfied with the terms, sign.
Completion and Funds Released
After the contract is signed, the loan is then transferred to the borrower. This can be completed in as little as 48 hours, depending on the lender, the process and the borrower’s cooperation. This speed is one of the key reasons so many property investors and developers choose fast bridging loans over traditional finance routes.
The Loan Term Begins
The borrower can then purchase, begin renovations or develop their property. Interest on the loan can either be rolled into the total amount (paid at the end) or deducted upfront, which usually means borrowers don’t have to make monthly payments. They have a set period, generally lasting from 3 to 18 months, to carry out their exit plan. If you’re weighing this up against longer-term options, our guide to bridging loans vs mortgages can help you decide which route is right for your project.
Repayment and Exit
Once the project is complete or the loan term ends, the borrower must repay the loan via their agreed-upon exit route. Borrowers may then choose to refinance into a standard mortgage following repayment, or sell their assets.
For a full breakdown of how bridging finance works across different property scenarios, including HMO conversions and development projects, take a look at our complete guide to bridging loans.
Get the Funds You Need With BFS
After reading this guide, you should now have a better understanding of what a bridging loan is and how it works.
Get in touch to find out more information on the types of bridging loans we offer, and how we can help you make it happen with your next project.
