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.
