Bridging loans…a swearword for many property investors. But is this still the right way to view them?
In short no! But let me explain my reasons.
Firstly, these loans differ significantly to mortgages taken out. Whilst mortgages are long term, affordable debt usually spanning decades, bridging loans are set up to be quick and nimble in a typically slow market. Here are the top 4 reasons bridging loans are taken out and why these are more appropriate than mortgages in some cases:
· A break in chain:
o Picture this. You find your dream home. The one you have coveted for years and it is up for sale. You put an offer in. It’s accepted and the mortgage offers. All is looking positive until you get that call that no one in a chain wants to hear from the estate agent; your seller has pulled out! It gets worse, the vendor has other options, one of which involves a cash buyer offering a slightly lower amount but completion in weeks not months. What do you do?
o Enter the bridging loan. Securing against your current property and your purchase property you are able to raise funds within 4 weeks. You then own two properties, but with the old property on the market it sells 4 months later. You clear the bridging loan with the sale proceeds as well as a small mortgage on your shiny new home. You live happily ever after.
o There is a limited timeframe to complete, commonly but not exclusively because the purchase is through a property auction. You are concerned that the mortgage lender will not be able to complete in 20 working days. This property has huge potential, and you know that if you can just get your hands on it, you can turn it into a beautiful home for you and your family or into an incredible investment property that will generate income for years to come.
o You don’t want to miss out, or worse, win and then be unable to complete. If you win and can’t complete you may lose your 10% deposit on the day, have incurred fees and, should the property go back to auction and sell for less, you may be liable for the difference between your purchase price and the new sale price. An expensive day out, why risk it?
· Asset rich but cash poor:
o You own property and have relatively little debt against it. You want to use this equity but you cannot access it easily/quickly enough. What to do? As above, you can access the funds for the purchase of a new property by bridging against more than one property. Effectively you can raise 100% LTV against the purchase property as it is secured against additional property.
o Let’s be honest, mortgage lenders like properties that are habitable. That is, after all, the function of the property. So when you come across a property that is straight out of a horror film but has huge potential (when the tree isn’t growing through the window and the kitchen consists of more than a disposable BBQ) you see the massive uptick in value. Taking a bridging loan in this scenario is the only alternative to buying cash, and when you have finished the project you can sell or exit onto a standard mortgage with the increased value taken by the new lender.
The key considerations when taking out a bridging loan are;
· The rate will look higher than a normal mortgage, but these are a means to an end and allow you to do things that a standard mortgage will not.
· There are no exit fees. You get in, do what you need to, and get out as quickly as possible. They are the SAS of the secured lending world.
· You need to have a feasible planned exit route: sale or refinance are most common. If there is no exit route available, you should not take a bridging loan out.
Bridging loans are not for everyone. They help individuals achieve what they need to achieve. When speaking to an advisor they are part of the advice piece as an option but not the only option. A good advisor will always seek to understand before seeking to be understood. To be sure, there are circumstances where these types of loans are wholly inappropriate, but it is incumbent on the advisor to explain all the options and for the client to make a choice from a position of knowledge.
Specialist Finance Consultant