Bridging loans can be used for a variety of different reasons; these range from auction purchases, to a borrower needing funds urgently because their original lender has let them down at the last minute.
Emergency funds may also be needed to ease a temporary business cash flow problem, or to pay a tax bill. Perhaps you are trying to complete on an urgent business deal but find yourself unexpectedly short of funds and need the bridging loan as the final piece of the jigsaw.
A number of borrowers use bridging finance to provide capital to add value to an existing property. An example of this is via refurbishment being carried out and they need the funds to carry out the work and on completion of the renovation they will either sell or refinance to a long term lender.
Buy to Let investors like using bridging finance to facilitate the purchase of property that they must complete on quickly and don't have the 4 - 10 weeks available to wait for traditional BTL mortgage.
So, what are the main reasons why bridging finance is used?
Speed - Investors are increasingly using bridging loans as a useful way to expedite the completion of their proposed transaction. Bridging lenders regularly provides funds to clients within seven working days, but in urgent cases funds can be released within 72 hours.
Condition of property - Traditional lenders, especially on buy-to-let mortgages, will often put 100% retention on a mortgage if the property has no kitchen, no bathroom or is in poor condition. A good bridging lender does not operate this retention system and instead bases its lending on the value of the property in its current condition.
Auctions - In auctions the buyer needs to raise the funds usually within 28 days of the hammer falling but due to uncertainty of success the buyer often does not want to go to the expense and inconvenience of obtaining finance prior to the auction taking place. Therefore the buyer waits until they know if they have been successful and then once the hammer has come down they arrange a bridging loan for completion. Often the reason for the bridging may be a combination of both speed but also, especially if it's a repossession, the condition of the property.
Chain breaking - You may have found your "dream house" but are unable to sell your current house within the necessary time frame. In these situations, a quality bridging lender will provide a bridging loan secured against your current home in order for you to transfer your current residential mortgage to your new property. You will then repay the bridging loan from the proceeds that will be generated from the sale of your current home.
Non status - With property based lenders, Income multiples and rental calculations do not form part of the underwriting process. A good lender is also open-minded regarding your credit history.
Second charge lending - Choose a lender willing to provide loans even when there is an existing mortgage on the property. This service can be useful if you have a significant amount of equity in your property, require funds for a short period of time (less than one year) and would prefer a second charge loan rather than a remortgage or a further advance on your current mortgage.
Be sure to choose a lender with no hidden fees in their terms, hence the company's clients don't get any nasty surprises upon completion.
Also, choose a lender who does not charge exit fees - ever - and interest is charged on a daily basis. This combined with competitive rates means that the borrower is really getting the best deal out there in the short term lending arena.