Using a bridging loan for stamp duty

2 Jun 2022

A bridging loan is a type of short-term finance that can help you bridge a gap in funding. It's often used in property purchases and to support a sale in getting over the line. Here we'll take a closer look at how bridge loans can be utilised in property and the broader sense.

House with a bridge to represent how a UK SME can use bridging loans to finance a property purchase

What is a bridging loan?

A bridging loan is a type of short-term finance that can help you bridge a gap in funding. It's often used in property purchases and to support a sale in getting over the line. Here we'll take a closer look at how bridge loans can be utilised in property and the broader sense. 

When buying a property, you'll need to factor how much stamp duty is owed into the overall cost of the purchase. Depending on the property's worth, you could have to pay anywhere between 2% and 12% of the purchase price. 

It might be possible to cover the cost of the stamp duty using bridging finance. Unlike traditional bank loans, which can take several weeks or months to process, bridging finance can be much quicker to obtain. 

Unlike mortgages, bridging loans are designed for short-term usage, typically for 20 to 35 years, and the terms are usually for 12 months. However, 24-month bridge loans are also available, depending on your needs and circumstances.

Although a bridging loan can be comparatively quick, the interest rates tend to be higher. Because the loan is secured against your property, it's essential to meet the agreed loan's repayment terms. If you don't, you'll risk losing your property.

You'll have to have an exit strategy when you take out a bridge loan. Your exit strategy is how you'll repay your bridge loan when the agreed time comes. If the exit strategy fails, you may have to pay high default charges.

Some bridge loan exit strategies lenders might consider include:

  • Sale of the primary property

  • Sale of a secondary property

  • Sale of investments

  • Refinancing a mortgage

  • Inheritance

  • Sale of shares

What else can bridging loans be used for?

Bridging finance can be used for various purposes and not always concerning property purchases. For instance, a business might use it to cover a temporary gap in cash flow. Here are a few scenarios in which bridging finance could prove helpful: 

1. Maintaining your place in the sales chain

If the sale of a property you're buying relies on the sale of another one, but the existing property sale can't be completed at the same time or before the one you want to purchase, you might be able to use a bridge loan to pay. The proceeds from the sale (once it goes through) will repay the bridge loan. 

2. For renovations, restorations and conversions

You might not be able to get a mortgage on a property you're buying because it's in poor condition, or it doesn't have a kitchen or bathroom, so it can't be rented out. 

In these instances, you might be able to secure bridging finance against the property. Landlords and property developers might do this if they want to purchase a property to renovate and sell or rent out using a buy-to-let mortgage. 

3. Purchasing a property at auction

When buying a property at auction, you'll usually have to pay a 10% deposit on the same day and settle the remaining amount within 28 days (or less). Because bridging finance can be set up relatively quickly, it could be used to complete the purchase. 

4. Fast purchases 

If you want to buy a bargain asset quickly but don't yet have the available funds, you might be able to cover the cost with a bridge loan until your capital is released. You might decide to sell the item for a profit and repay the bridge loan.

5. Overcoming short-term cash flow challenges

Most businesses experience a cash flow challenge at some point. You might need to secure a new asset quickly, need short-term finance to see your business through a seasonal trough, or need a cash boost to cover costs while you wait for a client to pay their invoice. Bridging finance may come in handy in these scenarios. 

6. Starting a business 

If the lender deems your exit strategy good enough, you can use bridging finance to start a business venture. For instance, startups sometimes use it to plug a gap in funding while they wait for their longer-term investment to come through. 

If you're looking to bridge a gap in funding, you can use Funding Options to see what you might be eligible for today. Our technology validates your business profile and matches you to the business finance industry's most significant lender network. 

Is my business eligible?

If you have a business that can meet its financial obligations, yes. Whether you are a sole trader, a partnership, a limited company, or a start-up - there are many kinds of bridging finance available with a lender to suit every business need.

How can I get a bridging loan?

You know your business; we know business finance. Finding the best bridging loan with the most competitive rates and from the ideal lender can be time-consuming and complicated. However, through our award-winning, innovative and data-driven platform, Funding Cloud™, we can offer speed and certainty for SMEs through a real-time, centralised and two-sided marketplace delivering instant decisions and firm offers from lenders. Register free today with Funding Cloud™ and connect your business to lenders and partners to facilitate fast, accurate and secure funding at scale.

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Vivek Seda
Vivek Seda

Asset Lending & Property Team Lead

Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.

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