How Landlords Use Bridging Finance Effectively in the UK

Bridging finance is a short-term loan used by landlords in the UK to manage cash flow and quickly buy new properties or improve existing ones. This type of financing has become an essential tool for landlords who want to expand their property portfolios, carry out restorations, and avoid the lengthy processes often associated with traditional house buying. 

Although bridging or swing loans (as they are known in the US) have been around for a long time, they have gained popularity in the last decade as a way to avoid traditional property chains and complete under shorter timeframes. Where banks have been restrictive in their lending, bridging finance lenders and private lenders have offered greater flexibility. Such is the popularity of the property, the industry value has increased in 10 years from £1 billion to £7 billion.

Used To Purchase New Properties, Quickly

Landlords often use bridging finance to quickly purchase new properties. Traditional mortgages can be slow to arrange, taking weeks or even months to be approved and finalized. This delay can be problematic in a competitive property market where desirable properties are snapped up quickly. 

Bridging finance, on the other hand, can be arranged much faster, sometimes within a matter of days, helping you take advantage of growing markets. This speed allows landlords to act quickly and secure properties as soon as they find them, without the risk of losing out to other buyers. By using bridging finance, landlords can expand their portfolios more efficiently and take advantage of market opportunities as they arise.

Fund Property Improvements

Landlords use bridging finance to fund improvements and restorations on their existing properties. Renovating a property can significantly increase its value and rental income potential. However, the costs associated with such work can be substantial. Bridging finance provides the necessary funds to carry out these improvements without having to wait for other sources of funding. 

Once the renovations are completed and the property's value has increased, landlords can either refinance the property with a traditional mortgage or sell it for a profit. The proceeds from the sale or refinancing can then be used to repay the bridging loan. This approach allows landlords to enhance their properties and maximize their returns in a relatively short period.

Avoid Buying Chains

Another significant advantage of bridging finance is that it helps landlords avoid the traditional property buying chain. When buying a property through conventional means, transactions often depend on a chain of buyers and sellers. If one link in the chain breaks, the entire process can be delayed or even fall apart. 

This uncertainty can be frustrating and costly for landlords who need to move quickly. Bridging finance allows landlords to bypass the chain entirely, providing them with the funds to make a purchase without relying on the sale of another property. This independence from the chain reduces the risk of delays and helps landlords complete transactions more smoothly and efficiently.

Auction Purchases

Bridging finance can also be used for more complex property transactions, such as buying properties at auction. Properties bought at auction usually require immediate payment, often within 28 days. 

Traditional mortgages are rarely fast enough to meet this deadline, making bridging finance an ideal solution. Landlords can secure the necessary funds quickly to meet auction deadlines, allowing them to take advantage of potentially lucrative auction deals. Once the property is secured, landlords can then arrange long-term financing or sell the property to repay the bridging loan.

Consider The Risks and Costs

Despite its benefits, bridging finance does come with certain risks and costs. Interest rates on bridging loans are typically higher than those on traditional mortgages due to their short-term nature and the speed at which they are arranged. Based on current rates, mortgage rates are at around 5% per year, compared to the lowest bridging offering at around 12% per year.

There are also additional fees, such as arrangement fees and exit fees, that can add to the overall cost of the loan. Therefore, it is crucial for landlords to carefully consider the total costs and ensure they have a clear exit strategy for repaying the loan. Failure to repay a bridging loan on time can result in significant financial penalties and even the loss of the property used as collateral.

In summary, bridging finance offers landlords in the UK a flexible and speedy way to purchase new properties, carry out improvements, and avoid the complications of traditional house buying chains. While it comes with higher costs and certain risks, its benefits in terms of speed and flexibility make it a valuable tool for landlords looking to grow their property portfolios and increase their returns. By carefully managing the risks and planning their exit strategies, landlords can effectively use bridging finance to achieve their investment goals.