What is the Most Common Type of Short Term Property Finance?
Bridging finance is the most common forms of short term property financing. A bridging loan is a short-term financing option used to fill a gap in finances before a large payment such as the sale of a house or business. The most common use for a bridging loan is to break a chain when purchasing a property. Bridging loan funds can typically be accessed a lot quicker than a mortgage, so if time is of the essence, you could use a bridging loan to buy a house before selling your current home.
Because they’re short term, bridging loans can have flexible terms, usually up to 12 months, and unlike mortgages, they rarely have Early Repayment Fees. Additionally, if you pay off your loan within the terms, you’ll only pay interest on the months you had the loan for.
The application process for bridging finance is usually significantly simpler than with long term financing such as a mortgage, and there’s less emphasis on factors such as your income or credit score.
Bridging loans are repaid in a lump sum, so your affordability will typically be based around whether you can realistically sell an asset within the allocated timeframe, or refinance to a mortgage.
What Other Types of Short Term Property Finance Are There?
Second Charge Mortgages
A second charge mortgage is a loan secured against the equity in a property that already has an existing mortgage. It allows homeowners to borrow additional funds without altering their primary mortgage. The loan amount is based on the equity left after deducting the balance of the first mortgage. Second charge mortgages are used for purposes like home improvements or debt consolidation and typically offer lower interest rates than unsecured loans because they are secured against the property.
A second charge mortgage is still a mortgage, so there’s isn’t an option for terms as short as a bridging loan, but you can get a second charge mortgage with as little as five-year terms.
Remortgaging
Remortgaging to release equity involves switching to a new mortgage deal that allows homeowners to access some of the equity (the difference between the property's value and the outstanding mortgage balance) they have built up in their property over time. This process essentially involves borrowing more money against the value of the property, increasing the size of the mortgage.
Homeowners typically choose to release equity for various purposes, such as home improvements, funding education costs, starting a business, or consolidating higher-interest debts into a single, more manageable payment. By remortgaging, they can secure a larger loan amount than their current mortgage balance, using the property as collateral.
The amount of equity that can be released depends on factors such as the property's current value, the outstanding mortgage balance, and the lender's criteria. It's important to carefully consider the costs involved, including potential arrangement fees, valuation fees, and any early repayment charges from the existing mortgage lender, to assess whether remortgaging to release equity is financially beneficial in the long run.
Development Finance
Development finance is a type of funding specifically tailored for property developers to finance construction or renovation projects. It is designed to cover the costs associated with acquiring land, obtaining planning permissions, and developing properties into residential, commercial, or mixed-use buildings.
Development finance loans are typically structured with flexible terms that accommodate the project timeline, often ranging from several months to a few years. These loans can be used for ground-up developments, conversions, refurbishments, or property renovations, providing developers with the necessary capital to start and complete construction phases.
Interest rates for development finance tend to be higher than traditional mortgages due to the higher risks involved in property development. Lenders assess the viability of the project, the developer's track record, and the potential profitability of the development when determining loan terms.
Development finance plays a crucial role in the property development sector by enabling developers to undertake ambitious projects that contribute to urban regeneration and meet housing and commercial space demands in growing markets.
Commercial Mortgages
Commercial mortgages are loans specifically designed for businesses and investors to purchase or refinance commercial properties. These properties can include office buildings, retail spaces, industrial facilities, and mixed-use developments.
Unlike residential mortgages, which are used for homes occupied by the borrower, commercial mortgages are used for properties intended for business or investment purposes. They typically have longer terms than residential mortgages, ranging from 5 to 25 years, but it is possible to arrange short term commercial mortgages with terms as short as one year.
However, commercial mortgages may require a higher deposit or equity contribution from the borrower. Interest rates and terms vary based on factors such as the borrower's creditworthiness, the property's value and potential income, and prevailing economic conditions.
What Is The Eligibility Criteria For Short Term Property Finance?
The main factor determining whether you’ll qualify for a bridging loan is whether you have a sure-fire way to repay it within the timeframe. However, in many cases, a lender will want to get an idea of your needs and overall circumstances.
Here’s what a bridging lender may consider when applying for short term finance:
- Security - Bridging loans are usually secured against property, so lenders will assess the value and marketability of the property offered as security.
- Exit Strategy - You must have a clear plan to repay the loan within the agreed-upon term. This often involves the sale of property or refinancing to a mortgage.
- Creditworthiness - Lenders will typically take your credit history and overall financial situation into account, however, this is often less stringent than with a mortgage application.
- Purpose - You’ll need to provide a clear and valid reason for needing the bridging loan, such as purchasing a new property or funding home renovations.
- Income - Depending on the circumstances, some lenders may require evidence of income.
- Legal Requirements - You’ll need to meet the legal requirements, such as being of legal age, and providing necessary documentation such as identification, proof of address, and details of the property involved.
Watch our video below - Bridging Loans Explained: Costs, Timescales, Examples, & How To Get One
What Are The Advantages of Bridging Finance?
- Quick Access to Funds: Bridging loans provide fast financing, allowing you to act quickly in time-sensitive situations, such as buying a property at auction or breaking a mortgage chain.
- Flexibility: These loans can be used for various purposes, including property purchases, renovations, business opportunities, or debt consolidation.
- Short-Term Solution: Bridging loans are designed for short-term use, making them suitable for covering temporary gaps in funding.
- Interest-Only Payments: Often, bridging loans offer interest-only payment options during the term, reducing immediate financial pressure until the principal is repaid.
- Less Stringent Requirements: Compared to mortgages, bridging loans can have more lenient lending criteria, making them accessible to borrowers who might not qualify for other types of financing.
What Should You Consider Before Using Bridging Finance?
- Higher Interest Rates - Bridging loans typically have higher interest rates than long term finance, increasing your overall cost of borrowing.
- Fees and Charges - These loans often include additional fees such as arrangement fees, exit fees, and valuation fees, which can add to the overall cost.
- Short Repayment Period - The short-term nature of bridging loans means that you’ll typically need to repay the loan within a year. This can be challenging if the sale of the existing property or securing long-term financing takes longer than expected.
- Risk of Repossession - Since residential bridging loans are usually secured against property, failure to repay the loan on time can result in the lender repossessing the property.
- Financial Pressure - The higher cost and short repayment period can create financial pressure, especially if the borrower encounters delays or difficulties in selling the existing property or securing additional financing.
Want to know whether a bridging loan is right for you? Speak to a financial adviser below.
What Would You Use Short Term Finance For?
A bridging loan is primarily used to provide immediate funding when timing is crucial and traditional financing options are either unfeasible or not easily accessible.
Common uses include purchasing a new property before the sale of an existing home is finalised. This can help in the case where you come across a suitable property before finding a seller for your current home and you don’t want to lose out to another buyers.
Bridging loans can also be advantageous if you find a property you want to add to your investment portfolio and want to act quickly.
Short term loans are also employed for property renovation or development projects, providing capital to complete improvements before refinancing or selling a property.
Additionally, they can be used to cover short-term cash flow needs in businesses, such as meeting urgent expenses or seizing time-sensitive opportunities. This flexibility makes bridging loans an attractive option for individuals and businesses needing quick, short-term financial solutions.
Case Study: Read our case study on how we helped a client raise £247k capital to purchase a historic Grade II-listed farmhouse in Kent
Is Short Term Property Finance Expensive?
Yes, bridging loans can be relatively expensive compared to traditional mortgage loans or other forms of long-term financing. They typically come with higher interest rates and additional fees, which contribute to their overall cost.
Interest rates for bridging loans can range significantly depending on the lender, your credit history, and the specifics of the loan, but they are generally higher than mortgages.
In addition to interest, you may also have to pay arrangement fees, valuation fees, and legal fees, which can further add to the expense of the loan.
Despite being costly, bridging loans offer flexibility and speed that may justify their higher cost in situations where quick access to funds is crucial. As with any financial product, it's essential to carefully consider the total cost and terms of the loan before proceeding.
What Are The Shortest Terms You Can Get on a Bridging Loan?
Bridging loan terms can be as brief as one month. These ultra-short-term loans are designed to provide immediate, temporary financing for urgent needs, such as securing a property purchase, covering short-term cash flow gaps, or completing a quick renovation project.
The exact duration can vary depending on the lender and your specific situation, but typically, bridging loans are flexible and can be tailored to certain timeline, with terms ranging from one month to a year or longer.
What Types of Bridging Loans Are Available?
In bridging finance, there are two main types: regulated bridging loans and unregulated bridging loans.
You'll need a regulated bridging loan if you're purchasing a property for personal or family use. For commercial properties or non-residential purposes, like investments, an unregulated bridging loan (commercial bridge loan) is the right choice. If your plan involves selling the property to repay the loan rather than refinancing or selling another property, you'd typically opt for an unregulated bridge loan.
Regulated bridging loans are governed by the Financial Conduct Authority (FCA) and usually have shorter terms, typically up to 12 months. In contrast, unregulated bridging loans offer more flexibility with terms that can extend up to 36 months, catering to various financial strategies.
If you're uncertain about which option suits your situation best, it's wise to consult with a qualified adviser to determine the most appropriate bridging loan for your needs.
Case study: Read our case study below on how we helped our clients secure their retirement apartment: a wing on a historic Yorkshire mansion
How to Apply for Short Term Property Finance
If you're looking to access short term property finance, you may need the help of a specialist finance broker. An experienced broker can use their network of lenders and market expertise to find you the best deal on the market.
At Clifton Private Finance, we have an award-winning team of short-term finance brokers who can guide you through the process. We can offer comprehensive advice on your options and will help you find the most cost-effective solution.
If you want to get a clear idea of your options, call us, and an adviser will be able to discuss your situation in detail.
Call us on 0117 205 4827 or book a free consultation below.
