Bridging finance is well known for being a really useful finance option for purchasing property in limited timescales and trickier circumstances. However, bridging is also incredibly useful for all sorts of property renovation and building projects.
Before considering a bridging loan, however, it’s a good idea to use a bridging loan calculator as it will give you a rough estimation of the costs involved and whether bridging is right for you.
Here’s how bridging finance can be used to fund a variety of different renovation projects.
Increasing the value of your home before selling or re-mortgaging
Bridging finance can be used to fund renovation costs if you want to do some work on your home to increase the value of it before selling or re-financing the mortgage. Provided there is enough equity in your home (the percentage of the property that you own outright), a bridging loan can be secured against it whilst you’re carrying out the building work. If there isn’t enough equity in your home, then the loan can be secured against another property that you own instead (or across multiple properties).
If the plan is to sell your home after the work is complete, the bridging loan will be repaid from the proceeds of the sale. If you’re planning to re-mortgage instead, then the bridge will be repaid by the mortgage lender who you will pay back over the length of your new mortgage term.
Building your own home
If it’s your dream to build your own home rather than buy one, bridging finance could give you the ability to actually do it. Bridging can provide you with the funds to purchase a piece of land as well as covering the build costs if you already own a house with enough equity in it to secure the loan against. Or, if you already own a piece of land outright, you may be able to borrow against that if the build costs are considerably lower than the value of the land. Alternatively, if you have parents or family members who are willing to let you secure a bridging loan against a property they own, this could also be an option.
The idea would be to use the bridging loan to build the property, then when it’s complete you should be able to get a mortgage to refinance it.
Buying a fixer-upper
Buying a fixer-upper can be a really good way of getting your dream property for a fraction of the price. The general idea is that you use a bridging loan to purchase a lower value property, usually through an auction, and to carry out the renovations. Alternatively, if you are able to purchase the property with a traditional mortgage, then the bridging loan can be used just to cover the renovation costs if there is enough equity in the property to secure the loan against it.
Once you’ve carried out the renovations and increased the value of the property, then the bridging loan will be repaid using a mortgage.
Purchase, renovate and sell projects
Bridging is an ideal finance facility for ‘purchase, renovate and sell’ projects. A bridging loan can be used to cover part, or all, of the initial purchase plus the renovation costs, provided you have another property that can be used as additional security. If you have the cash available to purchase the property outright and you just need the loan to over renovations, then the bridge can be secured against the property you’re renovating.
Bridging is a short-term lending facility with terms of up to 12 months in most cases, so as long as the required work and sale can be completed within this timeframe, bridging is really useful for this type of renovation project.
Purchasing an unmortgageable property
Traditional banks and building societies will deem some properties to be ‘unmortgageable’ if they have certain issues. This limits those properties to cash buyers only as anyone who requires a mortgage to purchase the property will be unable to do so.
Factors that make a property unmortgageable include:
- The lack of a working kitchen or bathroom
- Only a very short lease remaining
- It is above a certain type of commercial property
- It is of non-standard construction
- It has a very low value – typically £50,000 or below
- It is derelict/has a weak structure
The benefit of bridging finance is that it can be secured against any type of property - even if it’s unfit for mortgage lending for any of the reasons mentioned above. So, a bridging loan can be used to purchase the property (usually at auction) and to cover any renovation costs required to make the property mortgageable again. To borrow more than the property is worth, however, you will need to have another property that can be used as additional security.
Once the property has been renovated, or had the lease renewed and value increased, you will be able to get a mortgage to refinance the bridging loan.