What is Bridging Finance
Bridging finance is a short term loan that is given on a property. A bridging loan is often much more flexible that standard mortgages, due to the short term nature of the loan. So, it may be easier to get bridging loans for buy to let properties rather than a normal buy to let mortgage.
Generally, bridging loans are used to fill in the gaps between expenditure and income, such as the time period between buying a new house and selling the old one. The terms on bridging loans tend to last between 1 to 18 months, but it is possible to find longer terms.
Are you eligible
There are a few factors that could affect eligibilty, as with any loan. First of all is the amount you want to borrow. Some lenders have a lower limit of £10,000 for individuals. However, it is possible to borrow much more depending on your circumstances.
Because bridging finance is secured against the property, most lenders will allow you to borrow up to 70% or 75% LTV without additional security. In some cases even as high as 85% LTV for refurbishing property. If you provide additional security, you could borrow up to 100% LTV and maybe more.
Due to the secured nature of bridging loans, most lenders aren’t too bothered by credit score or evidence of income. But, providing these details could help you get a better interest rate in some circumstances.
A massive factor in your eligibility is the proof of an exit plan once the term has finished. For more information click here.
When you could use bridging loans for buy to let properties
There are multiple scenarios when bridging loans for buy to let properties could be used.
Buying at auction
Bridging finance can be very fast to process when compared to alternatives. So when you are buying at an auction, or when you need finance fast, there are not many alternatives that could provide large amounts of finance within a short time period.
Buying / refurbishing an unmortgagable property
This is the case when the property being purchased needs considerable work doing to it. For example, if you’re buying a house with no working kitchen or bathroom. Bridging finance can be a lot more flexible than conventional mortgages, providing the finance needed to buy the property and and extra to complete the work needed.
You want to buy a new house before you sell your own
In situations where you have to move fast to buy a property you want, bridging finance can be a life saver. Because it is much faster to complete, it can allow you to move forward before you have sold your house. You are also able to raise substantial amounts of finance with bridging finance. This means it could be a valid alternative than having to wait until your house is sold. This process is called chain breaking.
Lenders costs of Bridging Finance
Whist bridging finance can be very useful, there are a number of cost to be aware of which lender may charge. Due to these variations its important to speak to an expert who knows the market
The interest rate
Bridging rates are higher than standard mortgage rates. However the finance is usually short term so the rates may have less impact as the borrowing is only be for a few months. Expect to pay rates of between 0.45% and 1.25% per month. The variation will depend on the security being offered. Less attractive property and higher LTV’s will cost more.
The lenders admin fees
Also known as the application fee, lenders will charge a fee of normally between 1 and 2% of the capital borrowed – 2% is most common. This can normally be added to the loan. Therefore you don’t need to find this up front. However adding it to the loan means it is interest bearing for the term of the loan.
These are less common so most lenders don’t charge an exit fee. However check this out in the small print or ask your adviser.
Default fees / rates
These are the charges which can apply if you don’t pay off the loan by the agreed date. Again they vary by lender but need to be considered. This is especially important if there is a danger of you needing the loan for longer than first anticipated. Examples of default fees can include a higher interest rate after the end of the term. Another could be a further administration fee to renew the loan.
Every lender will need to understand the likely valuation of the security property. In some cases an electronic valuation will suffice. This is done by referencing databases of recent sales and valuations. Consequently its relatively cheap.
In most cases a physical valuation will be required to be carried out by a chartered surveyor. This can can slow the process down and will cost a few hundred pounds.
This will particularly apply if you are taking a first charge bridging loan as solicitors will need to register the charge at land registry. You will need your own solicitor and the lender normally expects to to cover it’s solicitors costs. This can sometimes be done with an undertaking from your to pay the fees on completion, or if your pull out of the deal.
As well as this, the bridging loan will be secured against your property. So, the property is at risk if you do not keep up repayments.
Bridging finance – costs versus benefit
Generally bridging finance is thought of as quite expensive. This is true although rates are far lower than they were a few years ago. There are many more lenders and competition has driven down costs.
With bridging it important not to get hung up on rates. you must look at teh overall cost versus the benefits:
- Why you are contemplating bridging in the first place. What is your goal – it may be to generate profit or or to buy the house of your dreams.
- What value can you put on that goal. It will be easy if you are borrowing to make profit. Less easy if it’s a subjective matter such as buying your perfect home before you sell your current house. However decide what you would pay to achieve that goal.
- Speak to an expert to get an understanding of the total costs of bridging and the likely time scales.
- Ask about alternative strategies to bridging – there may be an option you have not thought of
- Then weigh up the overall costs versus what you hope to achieve.
Many people go in to bridging without understanding the overall costs and how the process works. A conversation with an expert right at the start may help you decide early on if bridging is for you. They can talk hypothetically about your scenario which could help you save money and a lot of wasted time.
How long can I have a bridging loan?
Typically bridging is used for between 3 months and 1 year. However, when using a bridging loan to borrow against buy to let , commercial property or for business purposes, there are specialist bridging products which can stretch to 3 years. We even have an open ended bridge which can run for many years provided the repayments are serviced.
An exception is when you are securing a bridging loan on your main residence and the purpose is for personal use. This will normally be a regulated bridging loan and the term is limited to 12 months.
How does rolled up / retained / serviced interest work
This is where you agree to make the interest payments each month as they fall due. If you choose this option expect the lender to ask you to prove you have the income to support the repayments.
Bridging retained interest
Simply put, rather than you pay the monthly interest on the loan, all of the interest is added to the loan. So in effect you are borrowing the repayments and paying interest on it.
In the example of a 12 month loan the lender would hold on to 12 months payments. If you settle the loan earlier each full months unused interest would then be paid back to you.
- Pro’s – This helps your cash flow as you have no monthly payments during the term of the loan.
- Con’s – if you are borrowing to the maximum loan to value, this amount will be deducted from the cash you receive in hand – so it could leave you short.
Bridging rolled up interest
As with retained interest the lender will hold back the interest payments so the product is very similar in its effect. The amount you get in hand will be reduced by any interest added to the loan.
The key difference is that the lender calculates the interest as it accrues rather than adding a lump sum at the start. Therefore it can cost slightly less, especially if the loan lasts for a longer term.
Part serviced / Part retained interest
As it sounds, the lender may retain some of the interest for a few months and allow borrowers to service the interest for the rest of the term. This can be useful for some borrowers who need to look after cash flow for the first 6 months but can afford to service the loan thereafter. This approach also reduces the amount of interest deducted from the loan so gives you more in hand at day 1.
Bridging exit plan
One of the major factors in bridging finance is the need for an exit plan at the end of the term. When applying for a bridging loan, lenders have to be sure that they will be able to get their money back at the end. For example, an exit plan could be to sell the property at the end of the loan. A different plan could be to remortgage the property onto a different product, such as a standard buy to let mortgage.
Expect to be able to demonstrate a viable and plausible exit. If the plan is to refinance, the lender will expect your broker to provide a decision in principle from a lender willing to refinance the bridge. So if you have bad credit or poor proof of income ask your broker to research specialist products so you can show an acceptable exit.
Bridge to Let
Bridge to let loans are very similar to a standard bridging loan. However, these products are predetermined to convert to a standard buy to let mortgage at the end of the bridging term. This means that you have an in-built exit plan in the loan from the start.
Positives of Bridge to Let
Bridge to let allows you to guarantee an exit plan after your bridging loan. This is done by agreeing to go straight onto a buy to let mortgage with the same lender. One of the most obvious advantages of bridge to let is that you will not have to pay for the second mortgages application costs, as it is all the same deal. So, in the short term this can lead to financial savings.
As well as this, bridge to let also comes with all of the advantages included in normal bridging finance.
Negatives of Bridge to Let
The negatives of bridge to let loans are very similar to regular bridging loans on buy to let properties in that the rates are higher. Other factors to consider are that the bridge to let mortgages tend to come with cautious terms. They are less likely to be available if you need higher loan to values or are carrying out heavy refurbishments.
Consequently, you are gaining convenience but losing competitive advantage and access to other lender products
Are you eligible
The eligibility criteria for bridge to let loans are very similar to standard bridging loans. However, because you will be going straight into a buy to let mortgage at the end of the term, lenders are keen to look into that aspect too. With regards to this, lenders will look into your past experience as a landlord, or renovating a property. The latter is extremely important if you are using the loan to buy a property that is “unliveable”.
Additionally, your other assets will play a large role, as well as what you will be using as collateral. You will also have to prove that the property will generate enough rental income to afford the interest once the bridging term matures.
The final condition of the property also plays a big part. This is incase the lenders have to then sell the property on if you fail to keep up with payments.
If you are unsure whether bridging finance can help you purchase a buy to let property, contact an adviser.
Get more information on buy to let regulations.
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