Bridging loans are a non-standard mortgage product which can potentially be a good idea for residential homebuyers in several scenarios. Three common examples include:
- Property chains: Buyers stuck in a property chain that has stalled, or whose own buyer has pulled out unexpectedly at short notice.
- Short deadlines: Buyers who need access to cash at short notice, without the time to apply for a mortgage, such as when buying a property in an auction or where the seller is imposing a tight fixed deadline.
- Non-standard property: Buyers where the property would not ordinarily be mortgageable, such as where extensive renovation or refurbishment is needed to make the property habitable, or where there is a planned conversion of commercial to residential space.
The first instance is perhaps the most common example of the use of a bridging loan in what would otherwise be a normal transition from a residential mortgage on one property to another. This use of bridging loans could be particularly helpful in markets where the buyer is at risk of being ‘gazumped’, with the transaction falling through due to the unexpected entry of a higher bidder before the sale closes.
In property auctions, auction houses will require full payment by the winning bidder within a short time of the auction (such as 28 days), and failure to do so will result in the loss of the house and of the deposit already paid. This is unlikely to be sufficient time to have a mortgage application approved, and a bridging loan may be an attractive alternative until a standard mortgage can be arranged.
In the final category, permitted (or light) development bridging loans may be appropriate for financing building renovation, as well as the conversion of a mixed-use or commercial property (such as a shop with a flat above) to fully residential use. Many mortgage lenders will not normally lend against such developments, or will categorise them as commercial use, and so charge a higher interest rate. A related use for bridging finance is via the use of a second-charge bridging loan, upon a house with an existing mortgage, to pay for renovation works.
While the speed and flexibility of bridging loans are a major advantage, their higher cost means borrowers need to plan and budget carefully. Since bridging loans are time limited, they are unlikely to be useful if there is no reliable exit strategy. An appropriate strategy often includes sale of the property or the conversion to a standard residential mortgage. The exit event should have a very high likelihood of being completed within the timeframe.
Alternatives to bridging loans exist in most scenarios. For example, a personal loan may be viable if buying a low-priced derelict property with the intention of renovation. A standard mortgage with a speciality lender may also be an alternative. However, these decisions can be very complex, and a FCA regulated mortgage broker or bridging loan specialist will be able to help you navigate the market, understand your options and decide which suits you.
