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Everything You Need to Know About Bridging Finance

As a property investor, you’ve likely heard the term “bridging finance”. But what is it, exactly?

Bridging finance is a type of short-term loan that is used to boost your cash flow while you are awaiting long-term funding. Typically lasting between 12 and 18 months, property owners use bridge loans for various purposes, including acquiring, refurbishing, and renting property, or for buy-to-let mortgages.

As you can see, this type of financing is designed to fill or ‘bridge’ funding gaps. If you’re a property investor interested in learning about securing bridging finance, this blog discusses everything you need to know, including how bridging finance works, how it can be structured, and more.

How Does Bridge Financing Work?

There are several ways for an investor to secure bridge financing. Options vary according to your credit profile and history.

Bridge loans allow you to borrow anywhere between £50,000 and £10 million, depending on the value of your property. While the maximum loan, including interest, is often limited to 75% loan to value, some bridge lenders offer as much as 90% with a 10% deposit. Once you’ve secured your loan, you can expect to repay it either through a property sale, or through the traditional mortgage route.

How Can Bridge Financing Be Structured?

A bridge loan can be structured in various ways to suit the needs of each individual investor.

For example, some bridge financing is structured so the borrower pays interest every month, repaying the loan once the term ends. This arrangement is ideal for individuals with access to a steady cash flow for the length of the loan term. Alternatively, borrowers have the option of choosing between rolled-up or retained interest.

Unlike the more traditional structure, rolled-up interest allows the borrower to roll their interest into the loan balance, rather than repaying every month. Instead, the interest accumulates and is paid as a lump sum once the loan term ends.

The other option, retained interest, acts as the middle ground between traditional and rolled-up interest bridge loans. 

With retained interest, you can make monthly payments more manageable by retaining a set amount of the loan to use for a designated number of monthly payments. The number of months that the retained interest will cover is determined by the borrower, providing the lending criteria are met. If all the retained interest hasn’t been used up by the time the loan is repaid, your lender may provide a credit reflecting that value.

Little Known Facts About Bridge Financing

When it comes to financing, the bridge loan stands as perhaps the most misunderstood solution around today. Individuals and businesses alike tend to shy away from this funding option out of a lack of understanding and appreciation for what it offers. Rather than falling victim to this trend, here are some of the lesser-known facts about bridge loans to help you gain some insight:

  • Bridge loans are less expensive than current UK mortgage rates and longer-term financing products
  • Bridge financing can help clear adverse credit
  • A bridge loan can be tailored to suit a unique array of borrower needs
  • A bridge loan reduces the chances of a property investor being gazumped
  • Bridge loans make it easy to expand your investment portfolio
  • Bridge financing typically comes through quickly, providing funds in as little as three days

As you can see, bridge financing is a highly viable, convenient, and beneficial finance solution for property investors in need of a short-term solution.

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