With the property market in the doldrums, there are an increasing number of home-owners trapped in either in a negative equity position or with not enough capital to make the next step up onto the ladder.
Finding a solution is almost impossible and usually requires patience until the market picks up or more of the mortgage is paid off. Although it can be tempting to consider a bridging loan to plug the gap, this is not a good idea as the chances are when repayment is due you still won’t have enough equity in your property.
However, bridging loans can an absolute life-saver in some situations; the key is knowing when they should be utilized. Here is a guide to some of the circumstances when a bridging loan can be used to their full advantage.
Chain selling and buying cannot be synchronized
If you are selling an existing house and buying a new one, it can sometime be quite tricky to get all parties involved to commit to the same time scales.
Whilst it is certainly not ideal to complete the purchase of your new home before the sale of your existing property has been fully completed, there may be circumstances when this is necessary.
If the person you are buying your property from needs an urgent sale and cannot wait for all the red tape on your house sale to go through, a bridging loan could be the answer. You already know how much money your property is going to generate and simply need a short-term injection of cash until you complete.
By using a bridging loan in these circumstances, you make sure that you do not put your purchase in jeopardy whilst the sale of your existing property is processed. Once your old house is sold, the bridging loan is paid off immediately; this may mean that the loan is in place simply for a matter of a few weeks.
Seize the discount
In some cases, a fast purchase means the buyer can enjoy a generous discount on the price. However, if you are planning on selling your own home and are not on the verge of completing, waiting for the funds to become available could mean you miss out. A typical example of this could be a property bought at auction where completion within as little as 14 days can be a condition of the sale.
A bridging loan is perfect for providing urgent funds to tie up the deal, and can be repaid once you have raised the cash from selling your existing property. Typically a bridging loan will not be offered by companies such as financemyhouse.net for longer than 18 months.
Renovation and refurbishment
Whilst a bridging loan should never be considered as a replacement for a standard home loan, there are some circumstances when it is not possible to get access to mainstream finance.
If you have purchased a derelict building you may not be able to persuade a mainstream lender to provide any kind of finance, without which it would be impossible to renovate the site.
Properties purchased with the intention of re-mortgaging on a buy-to-let basis may also need extensive refurbishment or renovation to transform the property to an proper finish. It could well be impossible to get a mortgage on this basis in advance which is where the bridging loan can provide the necessary funds. Once the work is complete and the property re-mortgaged appropriately, the bridging loan can be cleared.
Bridging loans are not just suitable for individuals; they are often used in commercial ventures too and can prove to be a useful source of emergency funds.
In business it is sometimes imperative to move quickly and in these cases, a bridging loan can be used to supply the cash needed to secure a deal. The security is usually provided courtesy of property already owned by the company and the loan is paid off via the sale of assets upon completion of the project.
Firms experiencing a transitional period such as a change of ownership might also seek to use bridging loans to make sure an uninterrupted flow of cash into the business whilst the deal is finalized.
Bridging loans are a far more complex financial tool than other forms of borrowing and it is essential that any person or business considering using one is fully aware of the costs involved. It is also imperative to go to a trusted company to make sure that the lender is ethical and your personal data is safe with them. However, in the right circumstances with a responsible lender, a bridging loan can offer a solution without which would put a profitable project out of reach.
This bridging loans article is brought to you by Financial Services writer Samantha Wood.