Bridging loans are still being used for the original purpose which was to provide the missing equity when contracts are exchanged on a simultaneous basis on a sale and purchase, but there is a delay in the date of completion of the sale which would mean that funds from the sale are not available to complete the purchase.
In this closed bridge environment, where the time the funds are required is known, lenders are more than happy to lend on a very low risk transaction.
The other main use of bridging loans in property purchase is where property developers are buying houses, flats or commercial property, in need of care and restoration. By purchasing on a bridging loan the developer can refurbish the property and refinance on completion of the works onto a commercial mortgage, or sell the property for a higher sum to reflect the increased value due to the works carried out.
We are also seeing properties being purchased at below the true market value due to the credit crunch on bridging loans which are based on the bricks and mortar value rather than the purchase price. In some cases the bridging loan can almost be the same as the purchase price if the client is able to negotiate a very good price.
This then leaves the client to re-mortgage onto a normal buy to let or a commercial mortgage, at normal commercial rates of interest.