Cash Vs. investor or bridging borrowing  – which is king..??

Happy Friday everyone.   I hope you are all digging deep, it seems a lot tougher nearing the end.

As we work with so many property investors, the question of whether they should use cash or bridging to fund a project often comes up… so I thought this week’s blog would give both sides of the coin.

Your Own Cash

It’s easy to say it’s cheaper as you aren’t charged interest or fees – and at the moment when bank interest rates are so low it is tempting, but tying up cash stops it being used for something else, which will give a return. You could use your cash to fund two or three rather than just one project if you used bridging finance too.  It’s really important to always look at all options and what the net cost actually is. It all depends on how many projects you are planning on completing at once, and whether you have contingency funds if your project runs over time or cost. If you want to grow quickly then having cash available for the right project is important.

If you are buying solely with cash then another consideration should also be to use a solicitor that is used to working with lenders solicitors. If the legal work has only been looked at as a cash purchase then it can make it difficult when refinancing.  There is more work involved when someone is placing a charge on the property, and this can then cause delays at the refinance stage of its not been dealt with initially.

Using Other People’s funds

This really does keep your cash available for a profitable opportunity, and is the lowest cost borrowing option if you can access it at a reasonable rate given that there are no arrangement fees, exit fees and lender solicitor fees. Considerations would be:

  • Is there enough profit in the deal to ensure that your investors are repaid within the timescales you have agreed, and what’s your back up option?
  • You will usually need to borrow the full amount for the full time period, so your interest payment needs to be calculated ok this basis.
  • If you are using it with bridging, Lenders need to ensure the right people are on the application, so you need to have some experience to bring to the project before the lender will be happy for you to use investor funds.

Bridging Finance 

So after all that, why would you use bridging finance? The biggest advantage is the security; of having a mortgageable property that a bank will lend on, and a lender’s solicitor having seen the legals and being happy with the property. There is never a guaranteed exit to a term mortgage but it does help.

As we touched on before, it frees up your capital to look at multiple properties, or it can allow you to look at bigger projects with bigger profits. If your total spend becomes a 25% deposit (and maybe refurbishment costs) suddenly your budget is much bigger.

There are ways to mitigate costs too, especially when you’re looking at keeping the property:

  • If you are borrowing the refurb costs as well as the acquisition, then you will obtain the refurb costs in arrears as you spend them. This reduces the interest payable by about 40% and therefore can balance out the arrangement fees, exit fees and legal costs.
  • There are some bridge to term mortgage options, where there is a reduction in arrangement fees, valuation costs and/or legals when you use both products with the same lender. This can mean that you’re not paying out as much, and may therefore mean it’s a lower cost option to private investor funds for example.

As always, it does depend on your circumstances and the project you are looking at so please feel free to give us a call and chat it through.