This week we’re talking practical solutions to adding value to property. I’m often asked about bridging when clients have not used it before – the fear is that it is expensive and not necessary, mainly due to not understanding it or trying to do things without it.
The benefits of bridging?
Let’s start with why you would use bridging:
- it allows you to buy property which is otherwise unmortgageable – you effectively become a cash buyer. Properties without kitchens or bathrooms, in need of renovations or where the planning or usage needs changing, can be bought.
- It allows you to move quickly – this may or may not be important, but we can complete in a few days or a few weeks without too many issues. This means if you have a distressed sale, auction or the vendor wants a quick completion then you can offer that (to hopefully negotiate a lower price too!)
- It allows you to buy property to complete works to then move onto another mortgage (at a higher value) within a quick period of time, without the need to pay early repayment charges
- It allows you to borrow 75% of the purchase price even if the rental figure doesn’t get you to this on a standard BTL mortgage.
- It allows you to free up your cash for other opportunities that may come along while this one is in progress.
Borrowing for refurbishment costs
Another big advantage is that it allows you to borrow your refurbishment costs in certain scenarios:
Upfront costs towards your refurb
We have a lender that will allow you to borrow 75% towards the purchase of your property and then an additional 10% towards the refurbishment so a total of 85%. You do need to ensure that you stay under 75% of your GDV, and you need to have completed something similar previously, but this is a great way to maximise your borrowing.
This works well for light refurbishments where the EPC isn’t right, or the property just isn’t in a lettable condition due to the decor or floor coverings or something similar.
Refurb costs in arrears
Where the refurbishment is bigger, you can look to borrow these costs in arrears. There are some caveats to this, as the lender needs to get comfortable with the project as they will be funding it. There needs to be some profit in the deal (a minimum of 10% if you are retaining the asset, about 15% if you plan to sell it). The costs need to be a minimum of about £60,000 to make it worthwhile too, as you need to spend some before you get it back to spend it again. You therefore need some working capital.
This is great for larger projects, developments, commercial to residential conversions and HMO conversions where the profit allows. It allows you to minimise the amount you are putting into the deal and maximise the number of deals you can complete.
So what about the disadvantages? Are there any?
If you have access to funds with a lower interest rate and cost then it is a consideration to use that instead. This may be from a refinance of another property, or a gift or loan from family or friends. This can work out less expensive, but you haven’t got the security of a mortgage valuation and lender legals to do those additional checks for you – there are pros and cons and it would be up to you to decide what is best. We can talk it through it that would help.
Bridging is the most expensive form of mortgage borrowing, as it is the most risky. You have got to factor that into your costings and ensure you are still making a profit after your finance costs.
Where I find that clients have had bad experiences, it is usually due to not understanding the full costs involved – whether that is exit fees, monitoring fees or extension fees. Knowing the full picture and ensuring you fully understand what you are getting into is so important. We only work with reputable lenders who are transparent with their costings and deliver on what they say they do – there are still plenty that don’t though, so be careful!
As always it’s about doing your due diligence and knowing who you are working with and all the costs upfront. Bridging is a means to an end and it’s so important not to loose sight of the prize at the end!