Most people looking to purchase a property apply for a conventional mortgage without a second thought. Traditional mortgage products remain the number-one choice for property purchases, though are not without their flaws.
Complex and time consuming, a typical mortgage application can take as long as 12 weeks to process. During which, applicants with imperfect credit can expect a less-than friendly rejection at some point along the way.
But is there an alternative option available that improves on the imperfections of conventional home loans? Could bridging finance be advantageous over a traditional mortgage, and in what ways?
Increasingly, bridging finance is becoming the preferred choice for buyers who would prefer to sidestep the rigmarole of applying for a conventional mortgage. For eligible borrowers, the potential benefits of bridging loans for purchasing a home are as follows:
1. No more broken property chains
Bridging finance effectively turns the borrower into a cash buyer, giving them the spending power they need to avoid becoming part of a property chain. Where a potential buyer lets you down at the last moment or you are yet to find a suitable buyer for your home, bridging finance can be used to buy your next home and ‘bridge’ the gap.
As bridging finance can usually be arranged in less than a week, it can also be just the thing for beating rival bidders to the punch.
2. Choose from a wider range of properties
Conventional mortgages and home loans can only be taken out against certain types of properties. Most major banks are unwilling to lend against homes in need of extensive repairs and renovations, which often sell for exceptionally low prices. Bridging finance is different in that the funds can be secured against almost any type of property in any condition.
This gives potential buyers more freedom of choice - particularly those looking for a ‘fixer upper’ to renovate themselves.
3. Repay early to save money
The short-term nature of a bridging loan can also make it a highly cost-effective facility. Monthly interest varies from one lender and product to the next, but can be as low as 0.5%. Where a bridging loan is repaid promptly after a few months, overall borrowing costs can be significantly lower than those of a comparable mortgage.
In addition, many bridging loan specialists welcome and encourage an early repayment, rather than penalising it like most conventional mortgage providers do.
4. Buy a home at auction
Auction property purchases are typically only open to those who can pay for the homes they bid on in cash. After the hammer goes down, you have just four weeks to repay the full outstanding balance, or you may forfeit your deposit. As bridging finance gives the borrower the spending power of a cash buyer, it opens the door to bargain property purchases at auction.
This is often where the cheapest homes in need of repairs and renovations are sold, typically for significantly less than their true market values.
5. Maximise your home’s market value
One of the most common uses for bridging finance is to fund pre-sale renovations and improvements, in order to maximise a home’s market value. Popular examples of which include kitchen refits, bathroom renovations, loft conversions and property extensions - all adding to the market value of a property set to go on sale. Strategic renovations like these can generate the kinds of profits that augment bridging loan borrowing costs by a sizeable margin.
Arranged with the help and support of an experienced broker, an affordable bridging loan taken out at the right time can be a surprisingly profitable product.