Bridging finance is basically building a bridge between the date you need to pay for a house and when you receive the money for your mortgage.
It’s also often used as a short-term loan. Those who know a little something about short-term loans will know that they are often much more expensive. If it’s such an expensive loan, then why would you want to get one?
A ‘chain’ refers to the queue of hands that the buying process must travel through before you can buy a property. It might start with the buyer of your own property, then the bank, then you, the seller of the property you are buying, and probably a host of lawyers. Of course, that could be ad infinitum as the seller of the property you bought uses that money to buy a property they are interested in, and so forth. Sellers don’t often like being part of a chain because it means there are more variables to disrupt prompt payment, and breaking the chain could make your offer more attractive to them.
One of the primary functions of bridging loans is to allow those purchasing a property to pay for it before they have sold their own – therefore breaking the chain because you no longer rely on anyone else to pay for the property. Alternatively, a buyer might simply be waiting for a mortgage to process, but the property you want needs to be snatched up asap. You can bridge that gap in time with bridging finance. Once a seller has sold their property or obtained their mortgage, they can use that income to redeem the loan.
It can be risky to get a bridging loan when you haven’t had a mortgage approved yet. If the mortgage application should fall through, you will find it very difficult to get an application approved from a high street lender. The situation could prove extremely expensive if you end up having to continue payments for short-term finance. That’s why it’s essential you talk to a broker before you move forward with any short-term or bridging finance options.
If the property you are selling is in need of serious refurbishment, then you probably won’t get 100% of the mortgage amount. Lenders tend to retain some or all of the total loan amount if there is important work needed on your property. This is where bridging finance can come in handy. You can take a short-term loan out for the purpose of the refurbishment and, once your mortgage lender releases the funds, settle the short-term loan then.
The problem here is the time factor. Waiting for the refurbishment to be completed could put your offer on the new property in jeopardy, and the longer the refurbishment takes, the more expensive the loan is. Property developers and landlords may find this an attractive option when looking to refinance or if they simply need to complete work. There are options suitable for most situations, and to find one that’s bespoke to you, speak to a broker.
Buying at auction could be a great opportunity to get a great deal on a property. Repossessed houses, in particular, are usually being sold by banks who are not interested in making a profit, they’re just interested in getting their money back. That means there could be houses going for significantly under the market rate. However, it is more challenging for a buyer as you’ll need to quickly arrange a mortgage or funds to complete the purchase.
Having confidence that you can obtain funding is the worry of many buyers at auction. If you go through a broker, they may well be able to get an agreement in principle before or after the auction, which gives the seller more confidence in you. However, you’re often expected to complete the purchase around four weeks after the auction. Bridging finance can be used to help with financing until long-term funding has been secured.
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.
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. Once you have converted the property you can then apply for a residential or commercial mortgage if you want to retain the property or you can sell the property, pay back the bridging loan and keep any profit.
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 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 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 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 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.
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 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.
Have these scenarios not answered your questions about bridging finance? Are you looking for short-term funding for an entirely different purpose? We’ll be glad to help out. Go to our contact us page; we look forward to hearing from you!