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Bridging Loans – When would you use them?

25.02.19

A Bridging Loan, or Bridging Finance, is short term funding, secured against property or land, which can be used for a number of purposes until either more longer-term finance can be arranged or the property is sold to repay the loan.

This type of loan can be used for a number of reasons, although the most common are as follows:

  • Speed / Auction property
  • Refurbishment of a property
    It might be difficult to get a loan from a high street lender to develop a property that isn’t deemed suitable for security in its current state. Bridging finance can help you develop the value of your property.
  • Conversion of a property
    This might include the conversion of a residential property into a commercial one, or the other way around, where they can be purchased with or without planning permission.
  • Chain breaking
    You might have found a new property but haven’t been able to sell your current one yet, or perhaps the buyer dropped out. Bridging finance solutions allow you to take out a short-term loan on your current property, allowing you to transfer your mortgage to the one you intend to purchase. Once you have sold your previous property you simply redeem the bridging loan.
  • Below the market purchase (discounted purchase)
    This is where a buyer has negotiated a purchase price well below the property’s current value. Subject to the value of the property being confirmed, it is possible to arrange a bridging loan that is based on the current value of the property, rather than the actual purchase price. This means that the discounted purchase price can reduce the cash deposit required. This type of loan is typically repaid via a remortgage or the subsequent sale of the property.

Case Study

Refurbishment is a great way for landlords to increase the value of their property and boost their rental income. But when a property needs a significant and expensive ‘refurb’, it can sometimes be difficult to get lenders to be both flexible and price-competitive. In this case study, we show how one borrower managed to secure the refurb financing they needed in a matter of days.

The property

The property was a four-bedroom mid-terraced property in Putney, South West London. It had damp and needed to be completely gutted, before being refurbished with new plumbing and electricity.

The borrower

The borrower was a knowledgeable property investor, who wanted to purchase, extend and refurb the property through his company, with the aim of increasing the property’s overall value and rental value.

The refurb project

The borrower had a very clear idea of what needed to be done to make the property a good rental prospect, he had already completed similar works on his own property nearby. Even better, his wife was a very experienced architect.

The plan was for the refurb to be completed across five phases, with a total project timeline of 9-12 months. The refurb included a side return extension and a mansard roof extension, which would take it from a four-bedroom property to a five-bedroom. The plan also involved significant reconfiguration works, including refurbishment throughout and moving the existing staircase to create a better flow.

The problem

The biggest challenge facing the borrower was that no planning permission was in place. His applications were pending a decision. In the event that planning permission was not granted, ‘Plan B’ was to build an extension which could be carried out under permitted development rights.

However, this was really the least desirable option, as the extension would reduce the hoped for overall square footage and restrict the value placed on the property when the refurb was completed.

The broker: David Tinsley, Coreco Specialist Finance

Fortunately for the borrower, he had a very experienced broker working on his behalf: David Tinsley of Coreco Specialist Finance. Here’s what David told us:

“I was fortunate enough to be working with very charming, professional and engaged clients. This needed to be matched by an equally charming, professional and engaged lender! Having shortlisted a number of appropriate specialist bridging lenders, it turned out many came up short on the borrowing facility required. My clients were understandably price sensitive, both on interest and fees. But the excellent lender showed appetite, a can-do attitude, and a keen eye on pricing. They provided me with sufficient confidence to get this deal over the line.”

The solution

The lenders’ asset manager visited the property. They concluded that the borrower had a good understanding of the project, cost and design, as well as the planning process and permitted development. Therefore, they concluded the projected should be completed on time and on budget.

The lending terms

This loan had a first charge on the refurbishment property and a second charge on the residential property owned by the borrower, which was required in lieu of a deposit.

– Purchase price: £1,015,000

– Total loan: £1,356,250

– Interest rate p.a.: 9%

– Term: 16 months

– LTC: 88%

– GDV: £1,650,000

After purchasing the property, the borrower only paid interest on drawdowns.

Points to Note

Please note that the remortgage cannot always be done within the first six months of ownership.

Always be sure what you’re getting into with bridging finance solutions. While there are many advantages, the interest rates for bridging finance tend to be much higher.

If there aren’t many people enquiring into buying your home, then you might end up being forced to take a lower price for your property in order to pay off the mortgage.

We recommend you establish an exit strategy at the point of application to ensure the loan can be repaid.

To speak to one of our Short-Term Lending or Bridging Loan experts contact us here

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