Bridging - what is it?
Posted on 16th September 2021 at 17:38
Quite simply, a bridging loan is a mortgage for an 'unmortgageable' property.
If you have a property that just isn’t going to be somewhere you think a person could comfortably live, it’s likely that a mortgage lender will just decline to lend.
A bridge loan can then come into play.
It's basically a short term mortgage.
It lets you buy the property, carry out the works needed to bring it up to scratch and then either refinance into a mortgage or sell the property to make a profit.
Another good thing about a bridge loan is that, due to there being a little less underwriting etc, they can pay the money to you much quicker. This allows you to get the sale underway as soon as possible.
Sometimes you want to buy a property at auction. A mortgage will usually offer within a month however, its not likely that the legal side of things will be sorted by then too and you could end up either losing a lot of money or paying many late fees.
A bridge will complete before then leaving you plenty of time to arrange a new tenant and refinance.
When it comes to the refinance, if you have had the bridge for less than 6 months, you will need to look to more specialist lenders however, over the 6 months point and you shouldn’t have any problems at all.
Bridge loans can go as high as 75% LTV but, the best rates and fee structures are usually below 60% LTV.
That said, usually if a property is a bit rough, when you buy it for 60% LTV, you then add value to it with the refurbishment, you can usually refinance for up to 80% LTV of the NEW market value. This means you may be able to pull all of your money back out of the deal making this investment essentially 100% profit.
To be in the best place when you want to get a mortgage, make a list of the works needed and the timescale of this as well as having an idea of the new market value. Then you need to know what your exit route is.
This will help us place your case with the best lender and also help to speed up the process.
The bridge loan rate will be a little higher, calculated monthly and usually 'rolled up interest payments'.
This means you do not pay per month for this, it just gets taken off the end result. This is why you need to make sure you know what your exit will be. If you get stuck on a bridge, you will just end up incurring more and more charges and fees as well as the mounting interest and you could end up making a loss rather than profit.
That said, this is a very good way of financing your purchases when you are looking to refurbish a property or want to make sure your purchase is very quick. It also means you can buy a property cheap, make it better and then sell it/refinance it for profit.
Always happy to talk shop, get in touch - firstname.lastname@example.org or 07500 871209.
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