Property Finance Options - 4. Bridging Finance
Bridging finance can be used in various ways and it seems to be a product that people over look. I am assuming the main reason for this is again it is not common knowledge of exactly what is available.
Bridging finance is essentially short term finance that is required for 1-24 months. The pricing that goes with Bridging is usually based on LTV of the security. Normal pricing will start from 0.59% per month and go upwards to 1.35% per month. Although in certain cases and for the right deal I have been able to find bridging at 4.5% per year (0.375% per month) through private banking relationships. You will not normally have to make monthly payments on the borrowing, but when the debt is cleared this is when you will pay back everything at one go including arrangement fees and any interest accrued. Please note if you do want to make monthly payments to cover the interest, you will be able to. Arrangement fees range from 0%-3%, if you chose a 0% arrangement product it will normally mean you pay a higher monthly interest rate.
There are numerous reasons to use bridging finance. The most common reason is to go ahead with a property purchase before the sale of your existing property has completed, meaning you can break the chain and not lose the new property of your dreams. How this would work is the lender will take a security over both properties, release the cash to buy the new one and then when you sell your existing property you then pay back the funds you borrowed. Another way bridging is used is for purchases that need to complete in a fast timely manner, as bridging companies are normally able to complete in 3-4 weeks. This comes in handy is people are purchasing at auction and need the finance to be able to do it. Auction houses will have a 4 week completion timescale, if you haven’t completed in this timescale you will then lose your deposit which could be a costly exercise.
As mentioned earlier there are numerous ways bridging finance can be used, and yes it is a bit more costly than your regular mortgage but if used in the right way it can also be very beneficial. A deal we recently assisted a client on this year was a purchase of a rundown house that was unable to get a mortgage. The house was inhabitable and needed a lot of work before any normal mortgage lender would even contemplate the deal. So we bridged the initial purchase with a purchase price of £350,000. Our client spent £70,000 on a full renovation and fit out, which then allowed us to re-finance the property with a new lender after getting a brand new valuation on the property of £580,000. So we raised enough to clear the existing lending and the cost of renovation which then cleared the expensive debt and the client was left with a normal mortgage and a tidy £150,000 profit after all finance including fees had been cleared.
A bridging lender will always look for an exit route of the loan. This is the main criteria when lending the money. There are a few exit routes that are acceptable, these are sale of the property, re-finance and sale of other assets. When using sale of property and sale of other assets it is quite straight forward. When looking at re-finance as the exit it becomes a bit more complicated, the reason for this is the lender will have to then underwrite the final outcome and make sure it is possible for the client to re-finance. If the Bridging lender believes that the client will not be able to re-finance after their own assessments then they will not lend the money for obvious reasons.
If you have any enquiries regarding bridging or you are looking for more information then please get in touch James@mesafc.co.uk .
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