A Guide to Bridging Finance

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Bridging finance is a useful and versatile tool that many property investors use but often overlooked by buy to let landlords.

The following is an explanation of exactly what it is and how it can be used to improve and expand your property portfolio.

Whenever you think about bridging finance, you might consider it more of a tool to be used by property developers as opposed to buy to let landlords. However, this versatile finance is a brilliant tool that every landlord should have available, regardless of the size of your property portfolio.

What Is Bridging Finance?

Bridging finance is a type of short-term loan that’s often used whenever funds are needed quickly, since it is possible to access funds much quicker than traditional mortgage finance.

The bridging loan has a myriad of uses, but it is commonly used by investors to finish developments, bridge a funding shortfall between buying and selling if a sale is delayed, purchasing at auction and refurbishment; it is a very useful type of finance.

A bridging loan, as the name might suggest, is used for ‘bridging the gap’ from the point of purchase to the exit of the loan. Typically, the exit requires the loan to be refinanced or the property to be sold for the purpose of repaying the loan. Bridging lenders always require that you have an exit strategy in place before funds are released to ensure that you have the means to repay your loan. One of the most common types of bridging finance is residential bridging loans.

The speed at which you can receive funds is the key benefit of bridging finance, which is usually 3 to 4 weeks from application. It is this quality that gives borrowers greater flexibility when it comes to carrying out investment plans, as opposed to the need to wait for remortgage and raise capital, for example. It is due to this reason why bridging finance is a very handy tool for a buy to let landlord to have.

When Should Buy to Let Landlords Consider Using Bridging Finance?

Two of the most common uses for bridging finance by buy to let landlords:

–           Buying property at auction

–            Refurbishing buy to let property

Buying Property at Auction

Property auctions can be an excellent way to quickly purchase below open market value property and expand your buy to let portfolio.

Property investors typically use bridging finance since auction houses have a 4- to 6- week completion deadline, which means that securing a formal buy to let mortgage will probably not work with this timeline. Since it is possible for bridging finance to be arranged and drawn within 3 to 4 weeks, it is a far more reliable way of securing property purchased at auction.

Bridging finance is short-term finance as previously mentioned, and lenders will always require an “exit” strategy at the application point. When buying property at auction, there are 3 standard ‘exit’ options:

–           Letting the property – you refinance the property onto a buy to let mortgage

–           Refurbishing and selling the property

–           Refurbishing the property and retaining it as a buy to let.

If you plan to let out the property, you will need a Decision in Principle (DIP/AIP) for a buy to let mortgage when applying for bridging finance; it is actually something brokers can actually help you with.

Refurbishing Buy to let Property

Bridging finance for refurbishment can be categorised under light or heavy. Light refurbishment usually covers anything that is not a structural change and does not require planning permission: replacing bathrooms and kitchens, updating general wear and tear, or installing measures to increase EPC ratings. Improving your buy to let properties not only allows you to charge higher rents every month, but can also increase the property’s value.

If a property is not of rentable standards and requires work to attain a buy to let mortgage, you can use bridging finance to secure the purchase, complete the improvements needed before refinancing onto a buy to let mortgage. Under all these circumstances, instead of using a director’s loan or your savings, you can take out bridging finance for a short period to refinance the property at the end and repay your loan.

If you are a more experienced developer or landlord, you may be looking to extend a residential property, convert an old commercial property into a residential property, or a residential property into an HMO or Multi-Unit Freehold Block, which would be considered a heavy refurbishment.

How Does Bridging Finance Actually Work?

Bridging finance, as previously stated, is a form of short-term finance, which means that interest is typically charged on a monthly basis for about 3 to 18 months. Repayments are generally not made during the loan’s term, as for situations where the property is under refurbishment and thus not let out, lenders wouldn’t want to cause unnecessary financial stress on the borrower.

Lenders will sometimes consider letting you make repayments during the term of the loan, but this is only an option if you are of high net worth or are highly experienced with this type of finance. As is the case with most specialist forms of property finance, lenders typically assess each case individually, and your broker can help put across a case if they are confident that a lender is likely to consider it.

Bridging loans, at the moment, start from about 0.55% per month for a term of 9 months, with a gross maximum loan to value (LTV) of about 75%. Bridging lenders will deduct the product arrangement fee as well as the total predicted interest to be charged across the term from the outset, which means that the 75 percent LTV ends up being about 70 percent. A broker can help you do the calculations on the basis of your circumstances before making any applications.

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