Acquiring a bridging loan is done through a lender or broker. During the process, you need to agree on what the loan is being used for and the repayment terms.
Many lenders will evaluate what the loan is being used for and determine if they want to invest in it by lending the money.
So, in many cases, the loan is based on the repayment terms. And therefore, it has to be used for what was agreed upon.
The lender knows what the funds are being used for and has determined how reliable it will be to repay.
If you were to change your mind on the use, the lender might not see as much potential in the loan being paid back once the money is received.
It’s essential to be clear what the use of the bridging loan is, the payment terms, and that you will not be able to use it for any other reason in most cases. If needed for another reason, then a second loan will need to be taken out, and terms agreed according to what it is being used for.
Below are the uses of a bridging loan:
- Sale Chain-
When your former house is up for sale, and you want to purchase a new house, the bridging loan is used to secure the new house deposit and keep you in the sale chain.
A lot of the time, with property sales, you rely on the sale of your own house to purchase a new one.
However, using the bridging loan allows you to purchase a new property while still having your existing one, which will eventually be sold.
- Renovating, Converting, and Restoring-
You have a property in need of some renovating, converting, or restoring. If this is the case, the loan is used to contribute towards the project and help complete it.
It is used for anything relating to the renovation, conversion, or restoration of the property. As a result of the loan being used, it means the property has added value and sell for more money.
- Buying a Property at Auction-
Another use of the bridging loan is that it is used to purchase a property at auction.
If this is the case, then the loan is used to purchase it entirely at the auction and then paid back within a short time.
Very often with auction properties, it is used to renovate it, for it to be then sold again.
It means that it can be sold, and the money used to pay the loan back once that is done.
- Cash Flow Problems For Businesses-
Businesses can often come across cash flow problems such as customers not paying on time etc.
In this case, the loan is used to keep the cash flow running and avoid any disturbances or problems arising with the company.
It keeps the business running as usual, and the loan is used to fill in the gap of money missing until it is received.
- Inheritance Tax-
In the case of having to pay inheritance tax and fees relating to this that often, people aren’t prepared for, the bridging loan is used.
The loan is used to sort out any payments to get it sorted and then paid back within the year.
- Property Development-
Widespread use for the loan is that it is used for property development purposes.
This is mainly for builders and property developers to use it towards the property development project. The loan is like an investment into the project as it results in adding value to it.
Once the project is complete, the property is sold, and then the money from the sale is used to pay the loan back.
This is an everyday use for a bridging loan.
What You Need To Get A Bridging Loan
When getting a bridging loan, it requires some things to be approved and accepted.
- Security-
Security is essential and very much needed when it comes to getting a bridging loan.
The security is the equity in assets you own that the lender keeps until the loan is repaid.
This way, in the event of missing a payment or being unable to pay the loan, security is used to solve this and protect the lender.
All lenders require this as part of their application process and to be approved for it.
- Exit Strategy-
An exit strategy is also fundamental and needed to get a bridging loan.
This is the plan of how the loan is being paid back within the payment terms agreed.
In many cases relating to properties, it is reasonably easy and straightforward as the property’s sale is used to pay the loan back.
However, this isn’t always the case, so it’s something you need to think through.
- Documents-
Documents are something lenders might require proving the purchase of a property, the project’s plan, and even prove your financial history.
Each lender is different in what they require, but don’t be surprised if they want to look into this.
It gives the lender a bit more trust in the project that they are lending money towards.
Summary
A bridging loan is used for various reasons, but they are given on the specific terms agreed with the lender.
Some lenders may be flexible, but many of them will require the loan is only used for what was agreed upon in the terms.
Property Finance Partners offers many different types of finance for property investors and developers in the Uk. To find out more contact us on 020 3393 9277 or email info@propertyfinancepartners,com
