Bridging finance, commonly referred to as a “bridge loan” or “bridging loan,” is a short-term financial solution used to “bridge” the gap between two financial transactions. It is typically used when there is an urgent need for capital, such as purchasing a property before selling an existing one, funding construction projects, or addressing cash flow gaps. Bridging finance has grown in popularity, particularly in the UK, as it offers flexibility for individuals and businesses facing time-sensitive financial situations. This article delves into various aspects of bridging finance, including its application for borrowers with adverse credit, the types of properties it can cover, and its use for properties unsuitable for traditional mortgage financing.

What is Bridging Finance?

Bridging finance is essentially a form of secured loan that provides quick, temporary funding to borrowers. The loan is often repaid when the borrower secures long-term financing, sells a property, or completes a financial transaction. These loans can range from a few thousand to millions of pounds, depending on the lender and the borrower’s requirements. The key characteristic of bridging finance is its short-term nature, usually lasting from a few weeks to up to two years.

Bridging loans can be either closed or open:

• Closed bridging loans have a fixed repayment date. For example, if a borrower is waiting for the sale of their current property to go through, they may take out a closed bridging loan with a set repayment date once the sale is complete.
• Open bridging loans have no fixed repayment date. These are usually used by borrowers who do not have a clear timeline for when they can settle the loan, but they are expected to repay it as soon as they secure the necessary funds.

Adverse Credit and Bridging Finance

One of the significant advantages of bridging finance is its accessibility to borrowers with adverse credit histories. Traditional mortgages and loans usually require a good credit score, stable income, and other stringent criteria. Bridging lenders, however, are often more focused on the security being offered (usually property) and the borrower’s plan for repaying the loan, rather than their credit history.

Adverse credit refers to a poor credit score due to late payments, defaults, County Court Judgements (CCJs), or even bankruptcy. While adverse credit can significantly limit access to traditional financing options, many bridging lenders are willing to overlook poor credit in favor of the strength of the security and the exit strategy (how the borrower intends to repay the loan).

For example, a borrower with CCJs may struggle to get a mortgage or a business loan but could still secure bridging finance if they can offer a valuable property as collateral. As long as the lender is confident that the loan will be repaid, either through property sale or refinancing, they are more likely to approve the loan despite the borrower’s credit history. However, borrowers with adverse credit should expect to pay higher interest rates, as the perceived risk to the lender is higher.

Types of Properties Covered by Bridging Finance

Bridging finance can be used for a wide variety of property types, making it a versatile tool for property investors, developers, and homeowners. Some common property types that can be covered by bridging finance include:

1. Residential Properties

Bridging loans can be used to purchase or renovate residential properties. This is particularly useful in situations where the buyer is in a property chain, and there is a delay in the sale of their current home. Rather than losing out on their next property, the buyer can use a bridging loan to complete the purchase while waiting for the sale of their existing property.

In addition to purchasing homes, bridging loans can also be used for refurbishment projects, including both light and heavy renovations. For instance, a buyer might purchase a property in need of significant repairs that is not eligible for a mortgage in its current state. A bridging loan could cover the purchase and renovation costs, after which the property could be refinanced with a traditional mortgage or sold for a profit.

2. Commercial Properties

Bridging finance is commonly used for the purchase or development of commercial properties, including office buildings, warehouses, retail spaces, and industrial units. It’s an excellent option for business owners or developers who need quick access to funds to secure a commercial property or begin a new project.

For example, a developer may use a bridging loan to purchase land or an existing building that they plan to redevelop. Once the development is complete, they may refinance the property with a commercial mortgage or sell the property to repay the loan.

3. Mixed-Use Properties

Bridging loans can also be applied to mixed-use properties—buildings that have both residential and commercial elements. These properties often present difficulties in securing traditional mortgages, as lenders may have restrictions on mixed-use buildings. Bridging finance can offer a flexible solution for buyers looking to purchase or refurbish these types of properties.

4. Land Purchase

Bridging finance can be used to purchase land, particularly if the borrower plans to develop it. Traditional mortgages often do not cover land purchases unless there is an existing structure on the property. However, bridging loans can offer the necessary funds to purchase land quickly, which is crucial when developers need to secure plots in high-demand areas.

5. Auction Properties

Buying property at auction requires immediate payment, often within 28 days. This tight deadline makes traditional financing almost impossible to secure in time. Bridging loans are frequently used by property investors who buy properties at auction, as they provide the funds needed to complete the purchase within the required timeframe.

Bridging Finance for Properties Not Suitable for Mortgage Purposes

One of the most common reasons borrowers turn to bridging finance is that the property they wish to purchase or develop is not suitable for a traditional mortgage. There are several reasons a property might fall into this category:

1. Uninhabitable Properties

A property might be deemed uninhabitable due to significant structural issues, lack of essential services (such as running water or electricity), or being in a derelict state. Mortgage lenders typically refuse to lend against uninhabitable properties, as they consider them too risky. Bridging finance, however, can be used to purchase these properties, with the loan often covering renovation costs to bring the property up to mortgageable standards.

2. Non-Standard Construction

Properties built with non-standard materials or unconventional construction methods—such as timber frames, thatched roofs, or steel frames—may not qualify for a traditional mortgage. These properties are considered higher risk due to their perceived difficulty in resale or maintenance. Bridging finance, however, can provide a solution for buyers or developers looking to purchase and potentially improve non-standard properties.

3. Properties with Short Leases

Bridging loans are often used to finance the purchase of leasehold properties with short leases (typically under 70 years). Mortgage lenders are often reluctant to offer mortgages on properties with short leases due to the diminishing value of the lease over time. A bridging loan can provide the funds to purchase the property, with the borrower then extending the lease or refinancing once the lease issue is resolved.

Construction and Development Projects

Bridging finance is commonly used for construction and development projects, especially those involving property development or refurbishment. It provides developers with the capital they need to start or continue projects without waiting for long-term financing or cash flow from completed sales.

Developers may use bridging loans for:

• New build projects: A developer can use a bridging loan to purchase land and cover construction costs until the development is complete and the property is sold or refinanced.
• Refurbishment: Bridging finance is ideal for light or heavy refurbishments, especially when the property is initially uninhabitable or unsuitable for a mortgage.
• Conversions: Developers converting properties, such as transforming office spaces into residential units, often use bridging finance to cover the conversion costs before selling or refinancing the completed units.

Conclusion

Bridging finance offers a flexible, fast, and accessible solution for individuals and businesses facing time-sensitive financial needs. Whether it’s for purchasing property, funding construction projects, or addressing temporary cash flow gaps, bridging loans provide short-term financial relief, often in situations where traditional lending options fall short.

Borrowers with adverse credit histories can also benefit from bridging finance, as the loan is secured against property, and lenders place greater emphasis on the security and exit strategy. Additionally, bridging finance covers a wide variety of properties, including residential, commercial, and mixed-use buildings, and is particularly useful for properties unsuitable for mortgage purposes, such as uninhabitable homes or non-standard constructions.

Overall, bridging finance has become a critical tool in the property market, offering tailored solutions to meet the diverse needs of developers, investors, and homeowners alike.