So this week I’d like to talk to you about bridging loans.  Baya financial wrote an article recently on bridging loans in the NLIS Spotlight magazine a few months ago, however we are frequently asked questions regarding what bridging finance is and who should use it, so I thought I’d summarise it for you. I’m going to focus on how it works,  and offer a couple of scenarios of when you would be likely to use this type of finance.

 

The main reason people are a bit scared of bridging loans is that they don’t really understand how it works. The majority of investors think it’s expensive (which it is to be fair) but it really is a simple and useful tool for property investors to borrow money.  The important factor to always consider is your return on investment, and then put the finance costs into your model and see if it fits.

 

So how does it work? 

Bridging loans are extremely similar to a mortgage, the main difference being that your lender is far more concerned about the property as opposed to you personally, so you need to make sure the deal stacks up and you have a secure exit plan. This means a more in depth (and more expensive) valuation will be required, as they need to know far more about the property.  A valuation like this would typically include commentary surrounding what you are going to do with the property, and whether all the figures work. Legal fees will be more expensive as your solicitor will be expected to do more work than with a standard mortgage. This is because they are relying far more on the findings of their investigation.

Having said all that, they don’t really ask too many questions about you; you generally don’t need any proof of income, and all that would usually asked of you is to provide your ID and bank statements. It is much quicker to arrange than a standard mortgage, and you would expect to have it all completed within a few weeks.  We are comfortable completing a bridge under auction conditions for example, and you usually have 21 working days to achieve that. Bridging loans don’t have to be a arduous task as long as you ensure you have a competent and confident broker and solicitor at hand.

 

When do we see people using it?

Property investors choose to use bridging loans for a number of reasons, the most common of which is to add value to a property before refinancing, based on the new open market value of the property. This could be for any number of reasons, from it being an auction purchase or quick sale, all the way through to an extensive refurbishment or change of use to the property. Each case is individual, so its really important that you are up front and honest with your broker about your intentions, and our job is to find a lender who will be happy with your plans.

To give you an example of a case we have at the moment, our client has a detached property currently on 2 tiles and being used as one house. Our clients wants to split the property back to its original 2 semi detached houses. The clients are buying it, converting it back as well as extending both properties and then plan to sell them both. We have checked the affordability on a buy to let mortgage with their anticipated rental as a plan b (which is always good to have, especially in this market).  We are able to lend the clients 70% net on day one, and then the refurbishment costs in arrears as they spend their money on the project.

Another example would be our clients who bought a large property in Manchester to convert into an 8 bedroom HMO.  This required planning for a change of use from C3 to Sui Genaris. They had a plan for an 8 bedroom (assuming they would get planning), and a back up for a 6 bedroom if they didn’t. They started works, received planning and should have the project completed in the next 4 months.  With this project they didn’t need the refurbishment funds, but wanted a product that would allow them to move from the bridge to a term mortgage quickly afterwards as they plan to keep the property.  We have placed them with a lender who offers both products, allowing the client to move to the term mortgage with no additional lender fee and very small legal charges.

There are a few advantages to staying with the same lender for both parts of your mortgage. Apart from the above, you can also save money on the valuation and legal costs as you will work on the bank’s standard fee scale, rather than a bespoke quote. This will often mean you could receive third off the price you pay for both, when comparing to a standalone bridging lender. The move from bridge to term is more straightforward because the lender already has your documents, and a lot of the legal work has been completed already.

To summarise, as I mentioned last week it is so important to look at your over all project and work your finance costs into this. You also mustn’t underestimate your time, and it’s cost within your model. Using bridging loans can be such useful tools in your investor toolbox, as it opens up opportunities which just wouldn’t be there with a standard mortgage. It is also so quick in comparison to a standard mortgage – you could be in and out before your mortgage would have even completed!

As always, if there’s anything you would like to discuss in more detail then please give me a call.

We get lots of enquiries from potential clients asking about what we can offer, how much it will cost or what the interest rate would be.  This week I am going to talk about why this is often not the most important factor to consider when looking for a mortgage.

 

When you want an uplift on the bricks and mortar value!

 

There are many lenders offering low rates for investment properties, but they will nearly always value a property as a worst case scenario.  There are a few ways of valuing a property, for example with a block of flats you could look at it as a whole building being sold on to an investor, or as an aggregate value.  An aggregate value is when you add up the individual values of each of the flats, and the investment value would usually be about 10-15% below this figure.  If you want to maximise the money you can borrow then you need to look at someone who will look at an aggregate value.  The also applies to HMOs! Some lenders will look at it as an investment or as a HMO hybrid, even when you only have 4-6 bedrooms.  We are seeing this more when clients have changed the structure or layout of the property so it could be sold on as a HMO rather than a house – for example you have 5 large double bedroom with en-suites, as well as a kitchen with multiple hobs, sinks and fridges.

 

When you want to refinance immediately and not wait 6 months!

 

If you have bought a property at auction, which needs work, or was sold at undervalue, then you don’t necessarily want to leave your money in the property for any longer than necessary.  This can eat away at your profits and mean that you are unable to move on to your next project as quickly as you would like.  We have lenders who will allow you to refinance as soon as you are able to, immediately if you can, and release funds based on the true new open market value.  This is even more important when you are on bridging rates!

 

When your SA302 isn’t showing the minimum you think you need!

 

We are seeing more and more full-time investors refurbishing properties or selling properties and the losses making a big impact on their earnings.  This can cause issues with the majority of lenders, as they don’t look at the full picture.  Inevitably, this could cause you to have to wait to invest in your next project as your current broker or lender isn’t able to lend you anything now.  Going to a lender who understands the situation means that as long as your tax return makes sense, then they can take a look at the deal.

 

When you’re making enough from your portfolio that you’ve finally left the job you wanted to but you don’t have 2 years accounts!

 

 

 

We work with many property investors whose dream is to leave their 9-5 for the freedom they crave from their property portfolio.  Once you make that leap, the lack having 2 years accounts or a steady income can be an issue.  As I said above, you need a lender who will look at the whole picture.  This allows you to follow your dream, spend more time looking at potential deals and have a smooth transition into your full-time property career without any hiccups (that we can help prevent anyway!

 

When a property isn’t mortgageable and you need bridging finance!

 

I am going to talk more about this in next week’s blog, but I often get clients who are reluctant to use bridging as its seen as expensive.  My reaction is usually that if they think bridging is expensive then its not a good deal!  I’m not going to pretend that bridging is a low-cost option, but it allows you to be a ‘cash buyer’ in so many instances, and you have got to look at the bigger picture and your return on investment.  Bridging is so useful should any properties have short leases, no kitchen or bathroom, planning issues, structural issues, would benefit from works being completed or a refurbishment… I could go on! Then bridging is a great way of grabbing a bargain and then taking out a term mortgage once you have dealt with the issue, and then the mortgage will be based on the new open market value.

 

When you want to maximise your cash flow!

 

Cash flow is so important, particularly as you are growing your property portfolio.  Finding a lender who will allow you to borrow 75% loan to value on interest only is often key to ensuring you have enough money to move to your next property, and that you have enough income coming in each month. There are many lenders quoting low rates who will look at much lower loan to values, or on part or full capital repayment which isn’t necessarily helpful!

 

When assessing a property deal, you need to look at the overall picture, and what your return on investment and yield will be.  Work with a broker like us, who can not only find you a product with an interest rate that works, but also a product that meets your needs in all the other areas that are important to you too – ask them a different question to ‘what’s the best rate’ as that is probably not the most important factor to you!

Energy Performance Certificates, or EPCs, are an important legislation for tenants.  However this can be a headache for you Landlords, particularly for some properties where it only comes to light when a valuation is required or worse… the report is back!

You may also not be aware that the ‘no cost to landlord’ initiative no longer applies to properties that are an F or below.  For those of you that are unaware of this regulation, this means a Landlord must pay up to £3,500 to improve the rating to a minimum of E where a property is non compliant.

If you are purchasing a property, whether auction or traditional, reductions can be negotiated around a poor EPC rating.  Properties that have not been through the lender’s system for a while, may not comply.  It is not a deal breaker though!  If you know before you start the purchase or refinance process it can make life a bit easier, as we can be prepared.

There are a number of options if the EPC rating is below and E and therefore is not good enough for long term lending. We have plans allowing you to fund the refurbishments as well as carry out the work and making the property legal for a new tenant.  This can then be moved to the lower rate term mortgage.

Some lenders, where the property is otherwise mortgageable, will allow you to complete the works post completion within a particular timescale.

As always we focus on Return on Investment.  A poor EPC rating correction can increase the value of your property and we can lend in a number of instances, on the post works value.  With the right knowledge you could take advantage of a property where others have been put off.

 regular client of ours came to me last August with a property he had found at an auction in Derby.  The conversion to 5 flats from a Victorian town house had been done badly, and the client could see loads of potential with this project with it being in such poor condition (as you can see!)

He bought this property for £198,000 at auction, with the regular 28 days to complete.  Everything was going well until the valuation came in at £130,000, so far lower than anticipated, so we had to change lenders…with a week to go!  We love a challenge at Baya and have never missed an auction deadline (touch wood), so true to our word we changed lender and completed on the final day!  With a new desktop valuation, we were able to lend the client about £130,000 on a rolled-up bridge.

 

The client carried out extensive works to the property, creating an additional sixth flat in the basement (with planning permission) and a dormer extension to one of the flats, increasing its size from under 30m2 to a mortgageable size.  The property was stripped back to brick with a high-end finish to attract professional tenants. The total refurbishment cost came in at a total of £120,000. Inevitably, this renovation went over budget and timescale however, they completed at the and April and we had a new valuation completed.

The valuation came in at £450,000, exactly as the client estimated and he was over the moon! We were able to refinance at 75% LTV, giving the client an additional £200,000 after his bridge was paid off.  This has meant that he is going into his next project having taken all his money out of this one.

As a long-term investment, the rental for the flats comes to a total of £3,150 pcm and the mortgage is roughly £1300 a month so even with deducting 15% for voids and maintenance there is still over £1300 profit to be made each month. This goes to show that with the right due diligence, power team and access to the right lenders there are great deals to be done – even in this market!