Of course, there is a time and a place for mortgage lending, however in certain situations a traditional mortgage will not work. In such circumstances a property bridging loan could come to the rescue. Bridging loans are an everyday tool for the property investor, and as we shall see, can provide unique solutions to common questions.
What is a property bridging loan?
A property bridging loan is fundamentally just a type of short-term secured loan provided by specialist lenders to finance the purchase of a property. The loan will be secured against a property as a charge, meaning that in the event that the loan payments default, the lender will have the right to recover the loan through the sale of that property. The loan amounts are similar to mortgage lenders, however some significant differences set the two types of lending apart.
Bridging loans vs mortgages
Mortgage lending is a long-term loan for buying property that will generally be paid over a period of up to 25 years. Bridging loans, in contrast, are much shorter with a standard repayment period of 1 to 12 months. Bear in mind, the shorter payment term will incur significantly higher interest rates than a mortgage loan however.
One of the key benefits of a bridging loan is the speed at which the loan can be secured. While the process will still require a valuation by a RICS qualified surveyor, a bridging loan can normally be arranged within 3 weeks, occasionally even within 1 week depending on the availability of the surveyors. Anyone with experience of mortgage applications will appreciate that a mortgage will take well over a month to arrange.
Another key difference between a bridging loan and a mortgage loan concerns the lending criteria. Bridging lenders are much less stringent than mortgage lenders, meaning that more emphasis will be placed on the exit plan than on your personal income and circumstances. Having a demonstratable strategy for paying back the loan at the end of the term will be the main consideration.
Unlike mortgage lenders, bridging loan providers do not require the property to be habitable. Therefore it will be possible to arrange finance on a property that has no bathroom or kitchen and is currently being squatted by pigeons. The end value of the property once it has been done-up will be taken into account.
When to use a bridging loan
It can be seen therefore, how bridging loans can be utilised in a variety of situations. As mentioned, the main drawback of a bridge will be the increased cost of borrowing the money. As a property investor you will understand how to bake the additional costs into your calculations though, and clearly identify if the deal will meet your investment requirements or not.
The speed at which bridging loans can be arranged makes them a fan favourite for property auction purchases where often the sale will need to be completed within 28 days of the hammer coming down. The speed can give you the advantage outside of auctions also, where a lower offer price may be accepted if the seller is seeking a fast sale.
Those half-standing brick and mortar wrecks that once resembled a property can also be rescued with a bridging loan. Buying with a bridge will allow the investor to refurbish and repair the property, making it ready to refinance with a mortgage once it has been done up. For both rentals and flips, this can be a great way to benefit from the increase in value of a property. Paying back the bridging loan from either the mortgage or a sale will hopefully cover all of your costs plus maybe some extra profit..
On the subject of refurbishing properties to remortgage and rent out, if the property was initially purchased with a mortgage loan it will not be possible to remortgage until a number of months have passed. Here a property bridging loan can provide a solution by allowing the purchase to go ahead with a bridge and then replaced with a mortgage post-refurbishment within a very short period of time.
One more tool in the box
Property bridging loans are a very useful tool to ‘bridge-the-gap’ between the initial purchase and the arrangement of a mortgage. They allow the investor to buy un-mortgageable properties fast, with the view to refinance once the value has been increased. They also provide further purchase options that could be the answer in specific situations.
As with any tool, to use it safely and appropriately you need fully understand what it’s for and when to use it. Luckily your friendly mortgage broker will be there to assist you as each deal will require its own funding strategy. The best approach is to be upfront and crystal clear about what you want to do with the property. That way the broker will be able to suggest the best products for your needs.
The different finance options, when to use them and how to find a good broker are all covered in our Advanced Training Programme. Investing in quality education will be a huge asset to your journey but at the very least, understanding who to go to for solid advice will hopefully minimise your risks. With so many financing options available to the investor, getting the right product could make the difference between failure and success.