From A to Buy: how to use bridging finance

Whether you’re a complete mortgage newbie, an experienced investor or even an expert broker – it’s always worth staying educated on the broad financial options on the market, and bridging is one funding vehicle where we have seen a dramatic increase in popularity.

For fast and flexible finance, bridging loans are a useful way for buyers to secure opportunities. No longer viewed as a distress product, the versatile product has seen a growth in appetite across both personal and commercial finance customers. According to the latest Bridging Trends data, for Q1 2024 gross lending of bridging loans came to £196.2million.

Looking at its history, bridging was once a very specialist and mostly unknown product, but now has become more mainstream. At Together we accept applications from customers from a host of different backgrounds taking a common-sense approach to every case in order to judge each case on its merit. This means we consider applications from self-employed people, retirees and those with adverse credit.

In this guide, we’ve explained some of the ways our customers are using these loans to bridge the gap from opportunity to investment.

Bridging for EPC

Currently, there are over 8 million homes in England that already have an EPC rating falling below band C. These houses are classed as being low (poor) energy-efficient homes, according to the government.

A bridging loan would allow a property owner to fund improvements, such as adding wall and ceiling insulation or installing heat pumps or solar panels raising their EPC rating and reducing energy costs.

In addition to highlighting energy efficiency, a high EPC rating can also add considerable value to a property and be a positive contributing factor for potential buyers making the exercise a longer-term investment.

Bridging to renovate a rental property

Whilst flipping a property can see a quick and profitable return, many individuals are looking for a longer-term income stream.

Using a bridging loan, landlords can quickly purchase and renovate their property so it’s in a habitable shape for tenants to move, creating a steady rental income.

It also allows landlords to address any problems with the building that a lender might have, like structural issues, making it easier to get a long-term buy-to-let mortgage at a lower rate further down the line.

Bridging for Auctions

An auction buyer usually has just 28 days to complete a purchase, and so requires the funds fast.

With a standard personal mortgage or buy-to-let mortgage, the process can take between four to six weeks before an offer is even approved by some high-street lenders. Should the finance not be received in time, the buyer would almost certainly miss the deadline for completion, potentially meaning the loss of their 10% deposit as well as other additional costs from the auction house and seller.

Many properties sold at auction may not qualify for long-term finance as they may not be in a good enough condition to meet lending criteria. For example, auction properties may have structural issues, damp or missing facilities such as a bathroom or kitchen, making them ‘unmortgageable’ in the eyes of some traditional lenders.

With a bridging loan, the buyer can secure the property before the 28-day completion deadline, ensuring they don’t miss out on their opportunity. Once purchased, they can renovate up to the standard required to either secure long-term finance or to sell the property for profit.

Bridging for a property chain

In 2023, 35% of house sales in the UK fell through after an offer was made, jeopardizing the chances of buyers securing the home of their dreams.

A bridging loan can help individuals access the necessary funds to purchase their new home, repairing the chain break. It’ll also give them time to sell their existing property for the right price, without feeling pressured to sell quickly below market value.

Bridging for business purposes

Businesses need to periodically invest in order to continue to generate income. This could be buying and installing vital infrastructure needed to start trading, such as factory machinery, or completing a refurbishment on an ageing restaurant or shop, for example.

When the business doesn’t have funds upfront to pay for the necessary improvements, they can use a bridging loan to take their company to the next level. Once they start trading or start to see the fruits of their investment, the money generated can be used to repay the loan and any accrued interest.

Refinancing or managing cash flow

A bridging loan can be used if an individual or business has existing finance on a property and needs to quickly replace it. For example, the existing finance agreement could be about to run out and additional funds needed to make repayment is possible in order to avoid costly penalties.

In a business scenario, there may be times when owners need to raise capital quickly. A bridging loan can help to quickly pay off an unexpected tax bill, buy raw materials to fulfil a large order or take advantage of a business opportunity.

Development Funding

Bridging finance can also be used by developers, it can kick-start a project by allowing them to purchase the land they plan to build on.

In addition to this, at the end of a development project when the developer needs time and capital to market and sell the properties they can use a bridging loan to acquire the funds they need.

From concept to completion, we are seeing a lot of our developer customers turning to bridging loans to kick-start their projects.

What do you need to be aware of before getting a bridging loan?

Please bear in mind that bridging loans are intended to be used as a short-term finance solution. You will need to repay the full loan and the accrued interest within a 12-month period so it is important to know what your long-term finance strategy will be (e.g. selling or renting the property, using income from commercial activities, using income from an inheritance or divorce).

Some bridging loans don’t have early repayment charges associated. This means that being able to pay your full loan back after nine months, for example, will save you paying an additional three months’ worth of interest compared to waiting the full year to repay.

Bridging loans are typically offered at a higher interest rate than other longer-term solutions. You should research these options as well as bridging loans to see if they could be more suitable and cost-effective for you overall.

If you cannot repay your bridging loan within the agreed term and cannot arrange alternative financing with your lender, any property used as security, including your home, may be at risk of repossession.