Adding value to your property: How can a bridge to term product help you? 

What an amazing week we’ve had – we are still flying high from Wednesday night!! Roll on Sunday now…

This week I want to talk about bridge to term products specifically. Last week we covered bridging and why it is so important to add value to your property, but there is more to it – and there are ways to reduce your overall cost and this is a big one!

What is bridge to term? 

It is a product which allows you to use the same lender for the bridge to purchase the property and then use it as an exit onto a term mortgage as well.

How does it work? 

There are two types:

  • You can have it as ONE product, which means that you have two offers at the beginning (one for the bridge and one for the term) and the valuation with cover both products too, so you have certainly over the end value and what you can work towards.
  • You can have it as 2 products, so you apply for them separately and have two valuations and offers (the term gets started once works have been finished). This allows a valuation to take place once works are completed so you often get a more favourable figure, it can also take into consideration the finished property, which really can help. As with the same lender it has the advantage of lower arrangement and legal fees.

What are differences between this and a standard bridge?

From a cost point of view, you can save on valuation costs (in some instances), legal fees and arrangement fees. This will help to reduce your finance costs and increase your ROI. As bridging can be very expensive, this is a good way to bring it down.

It also offers you some certainty around the exit for your bridge. The lender will underwrite the case for the exit as well as your initial loan, so any issues with the property should be picked up on before you buy the property. There’s never a guarantee with these things, but it does mitigate some of the risk.

How much can I borrow and what works can be carried out? 

This depends on the type of product.

We have a lender who will look at both parts as one product, as mentioned earlier. This is ideal for light refurbishments before letting out as a single let. For example where the EPC isn’t good enough, or it needs a new kitchen or bathroom. We will know the end value from the schedule of works and the valuer will confirm this. You can borrow up to 65% for the purchase, and then 75% for the refinance. This is a low cost option and offers some security but does mean you are putting more in up front.  The 2nd valuation is only a revisit, to confirm the works have finished – it cannot change the GDV. You have to complete and refinance by 6 months maximum.

For more complex refurbishments, ie conversions from commercial to residential or to HMOs we have another product. This is set up as two products, a bridge to start and moving to a term facility when it’s finished.  The initial valuation will include GDV expectations from the valuer. For light refurbishment projects we can lend up to 85% of the purchase price (subject to some restrictions) and for heavy refurbishments we can go up to 75%. Heavy refurbishment would also include anything requiring planning or building regulations. You also have up to 18 months to do the works.

For the term exit we can generally lend up to 75% of the new value.

For both options we do not need to wait 6 months from the purchase.

As always, give me a call to discuss individual cases and how we can make it work. Have a fantastic weekend and come on England!

Case study: Don’t be afraid of an ugly property if the yield is good

We’re here at Friday again, nearly 3 weeks through however long this lockdown is going to last! I hope you’ve had a good week, we’ve been trying to find some happiness and laughter in each day to keep us going. We’ve also got a new American president this week, which has got to be a sign of a brighter future ahead.

This week I want to talk about ugly properties… in particular ugly blocks of flats.

I was approached by a client of ours late last year with a collection of four blocks of flats (32 units in total). The unit value is low (approximately £20,000), condition of the flats weren’t great, it had outside staircases (not balcony) and was let to tenants on housing benefit. Sounds like a great buy I hear you say!! Our client was drawn to the amazing 21% gross yield and gave us the task of finding a solution.

There were a few complications:

  • Various levels of experience and income from the 4 directors
  • A shareholder who would normally be expected to be a director and couldn’t be due to other work commitments
  • A complicated lease structure in place for the blocks of flats
  • The flats are in a variety of conditions, some have recently been renovated but some do need updating throughout
  • The majority were tenanted, but not all
  • Client wanted to avoid the bridging route

We researched the area; the client was able to provide plenty of reasons why this area was a good investment in terms of future regeneration. On cases like these, it really is important to be transparent with your broker.  To get a good outcome we really need to know the case and the applicants – warts and all… as we are the ones that need to sell it to the lender.

It is really important to know your lender’s appetite; we do work hard at our lender relationships, as that allows us direct access to the people we need, rather than putting into the system and hoping for the best.

We engaged a lender who we know are ok with low value properties and whom we trust to do what they say. They were able to look at the appearance and give us a good steer that they would be able to lend (subject to valuers comments). What we weren’t sure about was what the valuation would be and what loan to value we could get to.  Our client really wanted 75%.

The clients were happy to proceed so we instructed the valuation.  Although a purchase, we emphasised the importance of the clients meeting the surveyor on site which I think is really worth it if you can. It gives them confidence in you as an investor and you can talk them through your valuation methodology.

The valuation came back with the market value as the purchase price. The vacant possession and 180 day value were much lower though. The valuation read well and agreed with the client that it was a good investment with a good yield. We then had to wait for the lender to let us know what they could do, and they came back with an offer at 75% of the market value and on a term product. Best case scenario! The clients were very pleased.

Legals are going through now and we are hoping to complete within the next month.

So, the moral of the story… let your brain make the decision and not your heart.  An investment property is not your family home and it’s all about the numbers, so you must take the emotion out of it.

I hope this inspires you to look at some properties that perhaps are outside of your comfort zone to see what yield you could achieve.