29 Jul Bridging Finance for Acquiring Buy To Let and Other Investment Property
Bridging Finance for Acquiring Buy To Let and Other Investment Property
The objective of bridging finance is to quickly provide the short-term lending finance to acquire a property, later you can then remortgage it when it has been made suitable for mortgaging purposes, or simply sell on for a profit. Even the name bridging indicates that it is meant to be a link between one thing and another rather than a permanent arrangement in itself.
With bridging finance compared to the other more creative means of raising finance (say JV, Family Member Loan, Credit Card and Personal Loan advances etc) is the fact that you are back to more rigid constraints as to where the deposit money can come from. This source of the deposit funding comes under the same rules as discussed for buy-to-let mortgages.
The use of bridging finance is also very expensive in terms of both fees and interest payable and this finance is only intended and agreed to be loaned on a short term basis. This is typically six to twelve months and a maximum of two years. After this time, the full loan capital will need to be repaid. Otherwise, there are financial penalties, such as a vastly increased interest rate. This increase in interest rate is in the contract, which means you are forced to repay the capital amount on time or suffer heavy financial loss. Of course, if you simply can’t repay then you can be subject to repossession proceedings as with any other mortgage arrangement. The only difference is the fees and interest added during default will be much more if using a bridging loan.
Because of this, it is essential that you have a good exit strategy and preferably a choice of such strategies so that you can exit the bridging finance without problems. Remortgaging is the main one used in buy-to-let so it would be prudent to check that your proposed remortgaging scenario will be acceptable to lenders. You could give a potential remortgaging lender an outline of the proposal you are looking at to see if they find it likely to be acceptable for a remortgage.
This is just to ensure that the principle upon which you are working is acceptable to them for remortgaging purposes. Discuss with a few lenders about your proposal, or your mortgage advisor in order to check the validity of your remortgage proposition later, if this is to be one of your bridging finance exit strategies.
Some bridging financers also offer the option of moving to a buy-to-let mortgage at the end of the bridging term as part of the offer, this would at least secure one exit option. The downside to this is that the interest rates on such mortgage offers tend to be at least a few percent higher than what you would normally get on an equivalent buy-to-let remortgage. Finding such a deal however at least gives you some certainty and therefore peace of mind and secures one exit, albeit maybe not the cheapest.
If you have found a good property deal and can’t finance it any other way, bridging finance would at least mean you could take advantage of the deal you have found rather than let it pass you by. In fact, this financing only works well for very good property deals that are being sold at a price such as to leave a significant opportunity for uplift in value. In this case, the additional costs of the finance can be easily covered by the uplift in value itself.
As interest rates are high, these are often quoted on a monthly basis to sound more acceptable, and will be in the region of one to two percent per month. This in fact equates to the interest rates typical of higher-cost credit card lending! High arrangement fees can also be expected and possibly exit fees as well.
For those who would find it hard to pay the monthly interest payments, there are some bridging products where you can roll-up all the interest in one payment at the end of the loan term. This means the interest owing is paid at the same time as you pay back the loan capital.
The amount of the loan is solely focussed around value of the property rather than income, as there won’t be any rental income with an uninhabitable property. LTVs of up to 70% are possible although sometimes less than this depending on the lender.
It is beyond the scope of this blog to go into further details on this subject, but hopefully that gives you an appreciation and overview. I would always recommend discussing this with a good broker, and not just a bridging biased broker, but one that will be open to more conventional forms of finance as well, because there may be a cheaper solution there for you. If you need a recommendation on such a broker then drop me a note on email firstname.lastname@example.org and I will be pleased to assist in pointing you in the right direction, at least for an initial discussion.
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