The top 5 questions about Bridging Loans

Bridging loans are a powerful and flexible financial tool in the property world, designed to “bridge” funding gaps for various property projects. Whether you’re an aspiring property investor or a seasoned developer, understanding the intricacies of bridging finance is crucial. At Breeze Capital, we aim to demystify these solutions, providing clear answers to the most common questions we hear.

Let’s dive into the top 5 questions about bridging loans.

1. Can I Get a Bridging Loan with Bad Credit or Bankruptcy History?

One of the most frequent concerns for potential borrowers revolves around their credit history. Traditional lenders often have strict criteria, making it challenging for individuals with a less-than-perfect credit score or a past bankruptcy to secure finance.

However, specialist lenders like us here at Breeze Capital operate differently. We understand that life events can impact credit and not all “bad credit” is equal.

• Bad Credit: We take a pragmatic, case-by-case approach. Unlike high-street banks, we don’t automatically dismiss applications due to minor credit issues. For example, unpaid utility bills or parking fines, while technically “bad credit,” often don’t reflect a borrower’s ability to manage a significant property project. Our focus is on the overall viability of your project, your proposed exit strategy, and the asset itself, rather than solely on historical credit blemishes. We assess the context and severity of your credit issues.

• Bankruptcy History: For those with a bankruptcy history, our policy is clear: we will consider your application if your bankruptcy was discharged (officially ended) at least 12 months prior to your application. This period allows for a fresh start and demonstrates a degree of financial rehabilitation.

In essence, while your credit history is a factor, it’s not the only factor for us. We look at the bigger picture to provide opportunities where traditional lenders might not.

2. What Properties Qualify for Bridging Finance (Especially Unmortgageable, Auction, or Distressed Assets)?

Bridging finance excels where conventional mortgages often fail. Its flexibility means it can be secured against a wide array of property types, particularly those that are challenging to finance through standard routes.

Here’s a breakdown of qualifying properties:

• Unmortgageable Properties: This is a key strength of bridging loans. Many properties are deemed “unmortgageable” by high-street lenders due to their condition. This could include:

  • Properties with no functioning kitchen or bathroom.

  • Buildings without a valid energy performance certificate (EPC).

  • Properties with structural issues or extensive damage.

  • Those requiring significant refurbishment or renovation to make them habitable. Bridging finance is perfectly suited for these scenarios, allowing you to purchase and then fund the necessary works, ultimately transforming an unmortgageable asset into a valuable, financeable one.

• Auction Purchases: Property auctions demand speed. Successful bidders typically need to complete the purchase within 28 days – a timeframe impossible for most standard mortgages. Bridging loans provide the rapid access to funds needed to secure these deals, preventing you from losing your deposit and the property.

• Distressed Assets: Often found at auction or through specialist agents, distressed assets (e.g., repossessions, properties requiring urgent sale) can represent significant investment opportunities. Their “distressed” nature often means they are unmortgageable in their current state and require a swift purchase, making bridging finance an ideal solution.

• Other Qualifying Properties:

  • Residential Investment Properties: Houses, flats, HMOs (Houses in Multiple Occupation).

  • Commercial Properties: Offices, retail units, warehouses.

  • Land with Planning Permission: For development projects.

  • Semi-Commercial Properties: Mixed-use buildings.

Essentially, if a property has viable potential but needs a quick purchase or significant work to unlock its value, it’s likely a strong candidate for bridging finance.

3. Can I Use Bridging Finance for Auction Purchases?

Absolutely, and this is one of the most common and effective uses of bridging finance. As touched upon earlier, the swift completion periods mandated by property auctions – typically 28 days – make conventional mortgage financing impractical or impossible.

Here’s why bridging finance is the go-to solution for auctions:

• Speed: Bridging lenders specialise in rapid approvals and funding. Once your application is complete and due diligence is done, funds can often be released in a matter of days or weeks, comfortably meeting auction deadlines.

• Flexibility: It allows you to bid confidently at auction, knowing you have the financial backing to complete the purchase. This is particularly valuable for properties that might be unmortgageable in their current state, which are frequently found at auctions.

• Securing a Deal: Without bridging finance, many promising auction properties would be out of reach for investors who rely on traditional lending, meaning you could miss out on high-potential investments.

By leveraging bridging finance for an auction purchase, you gain a significant competitive edge, allowing you to act quickly and capitalise on lucrative opportunities.

4. What Are the Risks and Downsides of Bridging Finance (Costs, Repossession, High Interest)?

While bridging loans offer unparalleled flexibility and speed, it’s crucial to understand their associated risks and downsides. Transparency is key to making informed decisions.

• Higher Interest Rates: Bridging loans typically come with higher interest rates compared to traditional mortgages. This is because they are short-term, higher-risk loans designed for specific purposes. Interest can be charged monthly, or “rolled up” and paid at the end of the term, adding to the total cost.

• Fees: Beyond interest, there are typically various fees involved, which can include:

  • Arrangement Fees: An upfront charge (but added to the loan), often a percentage of the loan amount.

  • Valuation Fees: To assess the property’s value.

  • Legal Fees: For solicitors on both sides.

  • Exit Fees: Lenders also charge a fee upon repayment of the loan. These fees add to the overall cost and should be factored into your project budget.

• Repossession Risk: Like any secured loan, bridging finance uses your property as collateral. If you fail to repay the loan as per the agreed terms, the lender has the right to repossess and sell the property to recover their funds. This underscores the critical importance of a robust and achievable exit strategy.

• Reliance on Exit Strategy: The biggest risk lies in the exit strategy failing. If you cannot sell the property, refinance it, or secure alternative funds by the end of the loan term, you could face significant financial difficulties, including penalty interest rates or repossession. Market downturns, unforeseen delays in renovation, or difficulties in securing a long-term mortgage can all jeopardise an exit plan.

• Short Term Nature: While a benefit for speed, the short term means there’s less room for error. Delays can quickly escalate costs and pressure.

At Breeze Capital, we work closely with our clients to ensure they fully understand these risks and have a clear, viable exit plan in place before committing to a loan.

5. What Documentation or Proof of Income is Needed to Apply?

Applying for a bridging loan typically requires comprehensive documentation, but it’s generally more focused on the property, the project, and your exit strategy than a traditional mortgage’s emphasis on long-term income stability.

Here’s a general overview of what you’ll typically need:

• Proof of Identity and Address:

  • Passport or driving licence.

  • Utility bills or bank statements (dated within the last three months).

• Details of the Property:

  • Full address and property type.

  • Current valuation (if available) and purchase price.

  • Any relevant planning permissions or architectural drawings for development/refurbishment projects.

  • A breakdown of refurbishment or development costs (if applicable).

• Loan Specifics:

  • Desired loan amount.

  • Proposed loan term (e.g., 6, 12, 18 months).

• Clear Exit Strategy: This is paramount and requires solid evidence. Examples include:

  • Property Sale: Evidence of market demand, comparable sales, an estate agent’s appraisal, or a clear marketing plan.

  • Refinancing: A Decision in Principle (DIP) or agreement from a long-term mortgage lender.

  • Other Asset Sale: Documentation proving the value and saleability of other assets.

• Proof of Funds for Deposit/Contribution: Bank statements or other financial records showing your ability to contribute any required deposit or equity.

• Business Plan (for developers/larger projects): A detailed plan outlining the project timeline, costs, projected profits, and contingencies.

• Experience (for developers): A track record of previous successful projects can strengthen your application.

While proof of income (e.g., bank statements, tax returns) may be requested to assess overall financial standing, the primary focus for bridging loans is often on the value and viability of the collateral (security) property and the strength of your exit plan. Our team at Breeze Capital will guide you through the precise documentation required for your specific circumstances.

Summary

Bridging loans are an indispensable tool for property investors and developers navigating time-sensitive situations, unmortgageable assets, or auction purchases. They offer speed and flexibility that traditional finance cannot match. While specialist lenders like ourselves here at Breeze Capital are more accommodating of past credit issues and a wide range of properties qualify, it’s vital to understand the associated risks, including higher costs and the importance of a robust exit strategy. Providing comprehensive documentation, particularly regarding your project and repayment plan, is crucial for a smooth application process.

Understanding these key questions empowers you to use bridging finance effectively, unlocking property opportunities and driving your investment goals forward.

For more information on how Breeze Capital can help you with your property requirements, please call us on 01244 565095

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