The 5 buyers who may need a bridging loan

Rather than an emergency measure, a bridging loan can be a sensible part of the home buying process. Independent financial advice and the support of your estate agency team can help you utilise this short-term cash injection.  

Here are five types of house buyer that may benefit from a bridging loan:-  

1. The chain saver: the unpredictable nature of property does mean not every sale is smooth sailing. A bridging loan can help during a common but challenging circumstance – when a seller has their heart set on their dream onward purchase but they lose the buyer for their current home.

The cash from a bridging loan will provide the seller with the funds needed to purchase their next home. If opting for an ‘open’ bridge loan that can be repaid over 12 or even 24 months, the pressure will be taken off trying to find a new buyer. 

2. The ‘flipper’: flipping is all about identifying a bargain property, realising its potential and future worth, and executing a redevelopment programme to increase its value. Usually, success lies in renovations and remodelling but it’s common for the buyer to have exhausted their funds during the purchase.

A bridging loan can pay for the works, labour and materials but the flipper needs to be confident that the post-development sales price will return enough profit to clear the bridging loan.

3. The buy-to-let investor: with a Labour Government outlining its rental reforms, landlords will probably need to meet increasingly tough standards, such as a revised minimum EPC criteria and a Decent Homes Standard for the private rental sector.

A bridging loan can allow a landlord to buy an investment property that’s not quite up-to-scratch, using the loan to cover the cost of making energy efficiency and living standard improvements. Turning an inhabitable property into a rental one creates an income stream that can be used to pay off the loan.

Property investors may also want to explore ‘bridge to let’ loans that are attached to pre-approved buy-to-let mortgages. These are fixed-term loans specifically for landlords, allowing them to reserve a property they intend to rent out, but don't yet have the mortgage or deposit for.

4. The ‘do-er upper’: many people love the challenge of buying a wreck of a property and working hard to restore it to a habitable condition. Some unmodernised dwellings are deemed too risky for lenders and are classed as unmortgage-able – such as those not connected to the National Grid or without a working kitchen, for example. Therefore, the pool of buyers shrinks to just those with cash.

A bridging loan can be used to buy an unmortgage-able property outright and cover the modernisation/redevelopment costs. The key to making this work, however, is raising the standard of the home to such a level that a mortgage lender will refinance it with a traditional mortgage, ending the need for the bridging finance.

5. The auction buyer: purchasing a property at a traditional auction follows its own rules, with exchange taking place on the day and completion usually happening within 28 days. This unique method means large sums of cash are needed in a short timeframe.  

Those that don’t have substantial liquid assets often turn to bridging loans when they buy at auction, whether that’s borrowing enough to cover the deposit or enough to buy the property outright. A bridging loan provides the cash a buyer needs to confidently bid on a property, especially as not all property auctions will take bids from buyers who need a mortgage.   

If you fall into any of the above categories, talk to us about your moving plans. We can help you balance purchase prices with your plans and finances. Get in touch today.