When Are Bridging Loans Used To Purchase Property?

In a particularly fast-paced property market, an appealing buyer is not just one who can afford a property, either outright or through access to a mortgage, but one that can access that money as soon as possible and speed up the sales process.

According to Rightmove’s House Price Index, the average time to complete a sale is nearly 20 weeks, so any way to speed up this process will make a buyer more appealing, especially if they are able to buy now and are not part of a property chain.

For many people, both homeowners and small-scale property investors, their investment in a new property can often depend on the sale of a previous one, but bridging finance can help to separate the two sides of the purchase and ensure a sale goes through in the moment and settling the account later.

A bridging loan is a short-term loan that is secured against the new property that is used for a few reasons.

The first is to give flexibility to property investors and house flippers who intend to sell the property as soon as possible, especially if they buy it at auction or in another non-traditional sale such as for a rare house or a property that is not otherwise easily funded, particularly since bridging loans can be approved significantly faster than traditional mortgages.

The short time before repayment is needed is not a problem here since the intention is to sell the home before it becomes due, either as a specific part of the loan agreement or, in the case of an open bridging loan, selling it quickly avoids too much interest accruing.

The next, and the reason why bridging loans get their name, is that they serve as a bridge between two types of finance. Namely, the bridging loan allows someone to buy a home now and then arrange a more traditional long-term financing product such as a mortgage to pay back the bridge.

Finally, it is often used as a contingency plan if other forms of funding fall through. The most common example of this is if the property chain breaks due to a buyer further up the chain pulling out, affecting the rest of the chain up to that point.

A bridging loan can keep the sale going, and give a little breathing room for a buyer to either sell the house or sort out an alternative financial option such as a second mortgage.