Surprising uses for this flexible financePublished: February 11, 2019
What exactly is a bridging loan?
In short, a bridging loan is a type of finance that can almost miraculously make your important plans happen. That’s because this short-term lending option can be used to ‘bridge’ the gap between making a purchase and putting permanent funding into place, until the next stage of financing becomes available. Without this type of loan many people just wouldn’t be able to make their vision become a reality. A typical bridging loan is:
- Secured against an existing property the borrower already owns
- Repaid over a maximum time period, commonly up to as long as 12 months, but without a minimum term
- Usually more expensive than a mainstream mortgage, but this could be very well worthwhile if it saves you from an expensive problem, or makes a lucrative opportunity possible
The main reasons people use a bridging loan are to help secure the home of their dreams, to assist with downsizing to a more manageable home, or to finance a property investment. We cover these three popular and vital uses, along with four that are perhaps unexpected.
Purchasing the dream home
Imagine that you’ve found your ideal home, or want to build it, but there are serious obstacles in the way, such as:
- You can’t sell your old property quick enough to buy the new one
- The buyer of your old place drops out at the last minute
If you really don’t want to risk losing the new place, a bridging loan could be the answer. In fact, a bridging loan is perfect for ‘bridging’ the gap between buying a home and getting long-term funding in place.
Although they are thought of as a short-term lending option, a bridging loan can last 12 months or so, giving you a decent amount of time to sell your old property or arrange long-term finance.
They can be pretty flexible, so once your sale goes through, you could use the money raised to quickly reduce your borrowing. Then you could fully pay-off the bridging loan once the new mortgage or other funding comes through.
If you take out a bridging loan, for a short time you will own two properties, leaving you with a large amount of secured debt, so you need to carefully consider if you want to take on the risk involved.
Depending on the lender and the seller, it may be possible to use bridging finance to hold the home with just a deposit on it, rather than the full value of the property. Then you could repay the bridging finance once your existing home is sold or your mortgage comes through. Bridging loans are not usually available from high street banks, but they can be delivered by mortgage brokers such as Loan.co.uk.
Obviously, repaying your existing mortgage and a bridging loan simultaneously could put a strain on your finances, but you may be able to have the interest payments on the bridging loan rolled-up. That could mean that you would not have to make monthly repayments on the bridging loan. Instead, you may be able to pay a lump sum at the end of an agreed loan period. This could ease the pressure on your money. However, a bridging loan uses your property as collateral, and you need to think carefully before securing other debts against your home.
Why not ask one of the experts at Loan.co.uk for further help and advice on how a bridging loan could help make your plans happen?
Downsize without fuss and with minimal stress
If you own a property but you are looking to downsize, the chances are that you won’t need a mortgage. However, bridging finance can help you to buy the property you want before you sell the existing home. That means there would be no nail-biting wait to see if you can sell the old property in time to purchase the new one before someone else snaps it up.
Take advantage of a property development opportunity
A bridging loan can help you to fund a property development. Once the project has been completed, you can then either put it on the market (hopefully at a price that will deliver a respectable profit) or refinance the development with a long-term loan. This type of loan is particularly useful for developers because it can help with:
- Dilapidated properties.If a property has no toilets, bathroom or working kitchen, it is classed as dilapidated. A typical mortgage product would be unlikely to be approved.
- Renovation or development.A bridging loan may be used to renovate an existing property or to develop land into one or more homes.
- Taking advantage of market conditions and investment opportunities. This type of loan could help a developer to finalise negotiations and clinch a valuable opportunity. For example, being able to put finance in place without having to wait for long-term funding will generally be attractive to most sellers.
- Buying a below-market value property at auction If you buy a property at auction, you will need to pay the auction house within 28 days. A bridging loan can be used during this short time frame whilst you secure long- term finance. This can enable you to make the most of property investment opportunities that appear at auction houses.
Bridging loan eligibility
Different bridging loan lenders have different criteria around eligibility, with some preferring a case-by-case basis. Those who are eligible for bridging finance include:
- Companies and individuals
- Clients who are 18+ years old
- Clients with a good or weakened credit history
- Clients who are employed, self-employed or unemployed
- Clients with property in poor condition (even uninhabitable)
If you’re considering a bridging loan but are unsure of your eligibility, please contact us for more information.
Top reasons for taking out a bridging loan
According to Bridging Trends, the most popular purposes for a bridging loan, Quarter 4, 2018 are1:
- Auction purchase: 6%
- Re-bridge: 17%
- Business purposes: 18
- Mortgage delays: 18%
- Other: 19
- Re-furb: 25%
In fact, property refurbishment was the number one reason for obtaining a bridging loan overall in the UK during 2018.
Bridging loans are so flexible that they can be used in many other valuable ways, including some that you possibly didn’t know about:
1. Save your business from short-term business cash-flow problems
If you own a business, it is not unheard of to have to endure cash-flow issues. In fact, SMEs often find that cash-flow is a huge issue here in the UK, with the CBI recognising that it is now a chronic problem2. Along with the challenges provided by paying monthly overheads and salaries, there are likely to be creditors and suppliers to pay on time.
Then there are those unexpected curveballs to watch out for, from your bank unexpectedly withdrawing the overdraft facility you were counting on, to a customer being late to settle-up their account. In fact, the average wait for a company to pay a SME is now 72 days, according to a study by the Asset Based Finance Association2.
Your business may also suffer because it has too much stock as sales have unexpectedly slowed down, or because you happen to run a seasonal business. Perhaps you have allowed customers to have too much credit and they are dragging their heels now it is time for them to pay you. Maybe you need to fix structural problems with your building, or to invest in new machinery or company vehicles?
If your business suffers from any of these issues, a bridging loan could ‘bridge the gap’ in your company finances whilst you:
- Put a long-term alternative credit facility in place
- Your customers pay their bills
- The anticipated finance is in place
Before applying for a bridging loan to help with any of the situations outlined above, put together your exit plan for the repayment of the funds. This is because you need to be ready to articulate how you expect to pay-off your loan and how the business is predicted to get back to running as normal.
In certain circumstances, a bridging loan could make the difference between your business being able to continue and going under.
2. Pay your urgent tax liabilities If there is a shortfall between what you have put aside and the actual amount of tax due, you will need to find the difference before the payment deadline. If you don’t, you risk incurring stiff financial penalties. Typical tax liability scenarios include:
3. Income tax. If you are an employee, income tax is usually automatically deducted from your salary, but if you are self-employed, you will need to pay this tax directly to HMRC. It is usually wise to use the services of an accountant as working out a tax return can be quite complicated. Sometimes the tax bill can be significantly higher than anticipated.
4. Corporation tax. Just as an individual is usually liable for income tax, companies need to pay corporation tax on their profitable income.
5. Capital Gains Tax (CGT). If you sell a property at a profit that’s not your own home, you may have to pay CGT. For example, you may need to pay it if you sell:
- Buy-to-let properties
- Business premises
- Property you have inherited (more on this further below)
Tax is a complicated area though and the rules to tend to evolve, so it’s best to consult an account that specialises in this area.
3. Value Added Tax (VAT) If your business has a turnover that’s over £85,000, you are required by law to register for VAT and file VAT returns. That means you must charge VAT on goods and services and then pass the money due to HMRC.
VAT needs to be paid on:
- Business sales, such as when you sell goods and services
- Hiring or loaning goods
- Selling business assets
Working out VAT is not always as straightforward as many people or companies believe, so paying the correct amount has been known to occasionally cause issues. If you are hit by an unexpectedly large tax bill, a bridging loan could help you to settle it.
4. Cope with inheritance tax
Losing a loved one can be painful. To make things worse, following a death, if you inherit a large lump sum of money or other assets, you become liable for Inheritance tax. The rate of the tax that will apply depends on the value of the estate.
For example, if the property that you have inherited is worth more than £325,000, you would need to pay inheritance tax (IHT) on anything inherited above this amount. At the time of writing, the IHT rate is 40%.
The solicitor dealing with the will may be able to explain the value of what you have inherited, such as money within bank accounts, but you may need a valuation by a property expert to reveal how much a home or land is worth.
You would be expected to settle any applicable inheritance tax before you sell the home/land that you have been left in a will. Unless you have the funds on hand to pay this tax, things could become problematic very quickly.
A bridging loan may be a useful solution as it could be secured against the assets that you have inherited. That way you could pay the tax due without further stress during what is no doubt a difficult time. Once the inherited property is sold, you can then use the funds raised to repay the bridging loan.
5. Avoid the repossession of your home
If a lender gets a court order to gain possession of your home, it will usually be because you have not made the agreed repayments on a loan or mortgage that is secured on it.
Depending on the stage of the repossession, you may only be given a short period of time to either make up the amount that is in arrears, or to sell the property before is repossessed by the lender.
However, a repossession order may be ‘put on pause’ if you are able to make (or agree to make) payments. If you take out a bridging loan, you could buy yourself some time to find a buyer who is willing to pay the full, true market value price for your home. This means that you may end up making a decent profit on what you originally paid for the home, so you could repay the bridging loan and enjoy at least some of the equity you had in it.
On the other hand, if you just let the lender to go ahead and repossess your property, they may want to make a quick sale. Your property could be sold off for a lower amount than it is actually worth, with the sale not even covering the full amount still owed on the mortgage or secured loan. Therefore, your property could be sold off and yet you may still be left owing the lender money.
To see how you could benefit from a bridging loan, why not see your options and contact one our experts?
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OT ANY OTHER DEBT SECURED AGAINST IT.