Bridging vs self build finance

Traditional mortgages will always have their place amongst home and business owners. However, as the years go on, more and more specialist lenders are emerging. A mortgage in the traditional sense is no longer the most suitable property finance option when it comes to particular projects.

Different types of projects and buildings require different levels of funding and therefore a block of flats for example that is being redeveloped will not be best suited to the same type of finance for say a homeowner looking to build their home from scratch. Many lenders of specialist and short-term property finance tend to offer a few offerings to ensure they can provide the necessary funding to all nature of borrowers.

Two common property finance options are bridging finance and self-build finance (source: SPF Loans), both of which serve specific needs and when used correctly can make all the difference. Bridging finance is more common in the property market as it is more applicable to a wider range of borrowers. However, with increasing numbers of people seeing the benefits of building their own property anew, self-build finance is also increasing in its popularity.

Bridging finance

Bridging finance is well-established and is a well utilised way to bridge the gap between property purchases and the sale of an initial property that will inevitably be used to find the second property’s purchase. These loans are useful for both individual homeowners looking to move property and developers in the right circumstances. They are however, a short-term property finance solution and are not a replacement for a traditional mortgage.

How can a homeowner use a bridging loan?

The most common way for a homeowner to use bridging finance is when they are ‘in between’ purchases. This often happens when they are awaiting the completion of the sale of their current property to fund a second property’s purchase. Rather than having to wait until their current property’s sale goes through, they can purchase the new property in the interim period. This means that they do not lose out on a property purchase due to time restraints.

This is often the case when a property’s sale is all but complete, with another property lined up. If the initial ‘funding’ sale falls through, this would traditionally have left the homeowner out of pocket as they would lose the deposit they will have put down on the new property. It would also leave them in a desperate situation of having to push for a potentially lower price on their property to get the second property’s purchase through in time.

How does a bridging loan help?

Bridging loans help in these circumstances by providing the homeowner with a short-term funding solution that allows them not to miss out. This works by providing the borrower with the funds needed for the second property’s purchase in its entirety. This allows them the breathing space to get their initial property sold off. This is their ‘exit-strategy;’ their repayment method of their bridging loan.

Once their initial property is sold, that money is used towards the bridging loan and the new property is refinanced with a traditional, longer term and lower interest mortgage to pay off any remaining loan amount.

What is self-build finance?

Self-build finance is a specific type of property finance that is for those building a property (usually their primary place of residence). Although only around 10% of UK homes are true self-builds, these types of properties can fetch sometimes more than 20% compared to other types of similar style properties.

Whereas a mortgage entails borrowing a lump sum of money to make property repayments over a predetermined time and over a more manageable period of time, self-build finance is released in stages to the borrower. This is done for several reasons:

  1. It is a lot more manageable to repay smaller loan amounts as required rather than one large lump sum
  2. There is a greatly reduced risk from the lender’s point of view. For example, if the borrower defaults at an earlier stage, there is less money lost by the lender as a result and it is therefore much easier to recoup the amount owed
  3. Because of the reduced risks associated with loans with these terms, the interest on self-build loans is significantly lower than they would otherwise be for other forms of short term finance

Each stage of the self-build will require the necessary funding. The lender will therefore instruct a surveyor to break-down and value each stage. This means that the lender doesn’t pay out more than they need to and the borrower doesn’t borrow and therefore repay more than necessary.

Part of the project for self-builds will also include post-build checks such as Air Tightness Tests (Source: RJ Acoustics), adherence to Planning Permission and Building Control, potential impact on the surrounding neighbourhood and more. These will need to be incorporated into the costs when the surveyor makes their assessment.

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