The market for bridging finance in the UK shows no sign of slowing down, with lending in Q3 of 2017 at a new high of £4.7 billion, surpassing the pre-EU referendum high of £4.4 billion1. In this blog, we will answer some of the top questions you may have about bridging finance and how to secure it for your next property investment.
What is a bridging loan and how does it work?
A bridging loan is a form of short-term lending, which can be used to fill a gap in your finances or mortgage deposit. It would act as a safety net if your own funds were to fall short. It is also be known as ‘top-up finance’and can be customised to each borrower’s circumstances.
Due to the short-term nature of bridging loans, the interest rates are generally higher than a regular Residential or Buy to Let mortgage, and need to be backed by some form of security and exit strategy.
Why use bridging funds?
There are four main reasons why borrowers may choose bridging as a form of lending.
1. Your deposit falls short when looking to purchase a new property
If this is the case, you may first think that a high loan to value (LTV) regular mortgage is your only option. For this form of funding, which is considered higher risk, many mainstream lenders would require borrowers to have a safe and predictable income and clear credit history.7 This type of mortgage is not suitable for everyone, especially for those who would struggle to fit some lender’s strict affordability criteria.
For some people in this situation, a bridging loan can help. It can literally bridge the gap between your current funds and the deposit you need. As a result, you may need to arrange a high LTV mortgage from a lender. Bridging means that you do not have to miss out on a property investment opportunity when you do not have all the funds at present.
2. You need funding fast
You may have the funds available for the deposit for a purchase, yet you cannot access them in time to secure the property.
Bridging funds can usually be accessed and released within a few days. Therefore, this form of lending could be the answer if you have a tight deadline to secure funds.2 The lending you can arrange will depend on your circumstances.
3. Refurbishment or conversion
You may wish to carry out works on your property, whether it is used for commercial, Buy to Let or residential purposes, before you put it on the market. A bridging loan can fund these works, with the sale of the property, future rental income or a longer-term loan being the repayment vehicle/exit strategy.
4. A delay in arranging your mortgage
For whatever reason, some borrowers find that their mortgage takes longer for them to put in place than they anticipated. In these circumstances, a bridging loan can give allow them the breathing space and the time they require to arrange their mortgage.
What is an exit strategy and why is it important?
This brings us to the exit strategy. Bridging finance can be perceived as a high-risk form of lending by some banks. As a result, for your application to be considered by the lender, you will need to provide proof that you will be able to repay the loan once the loan term is up. It is vital to start devising your repayment plan before you approach a lender.
The form of repayment can depend on the type of investment property. For example, repayment for the purchase or renovation of a Buy to Let property can take the form of a longer term Buy to Let loan2. Repayment could also be funds from the sale of an unencumbered Buy to Let, Residential or Commercial property.
Typically, there are three common repayment vehicles (the savings, investments or other assets you use to pay off the total amount borrowed at the end of your mortgage term):
- The proceeds of a property sale – this can be the sale of the previous home or another security property in your portfolio.
- Another loan – a mortgage can be used to repay the short-term bridging once it has been put in place.
- Funds from another source – this can take the form of a lump sum payment from a maturing investment or a vesting bonus for example.
What type of property can I use bridging for?
Whilst a significant proportion of bridging investors currently are either self-employed builders or Buy to Let property investors3, it is very much possible to secure bridging funds to refurbish or purchase a residential or commercial property as well.
How much can I borrow?
There is no one answer to this question. The amount of money that you can borrow in the form of a bridging loan can vary widely between applicants and is dependent upon several factors. These include:
- The type of property being purchased/renovated/converted
- The value of the property
- The bridging loan term and interest rate offered by the lender
- Your security and proposed exit strategy
Although it is not possible to say precisely how much you can borrow without further knowledge, generally there is now an increased appetite for bridging in the mortgage market.4 This has, in turn, created more competition and pushed lenders to offer more flexible terms and affordability criteria, meaning that you may be able to borrow more than you think.
Can I get bridging finance for a property outside of London?
The simple answer is yes. Many lenders are willing to take a view on bridging applications for properties in various locations. A geographical spread in demand for bridging finance has been noticed in 2017, highlighted with data from a Broker Sentiment Survey4.
(bridgingandcommercial.co.uk – broker survey)
Whilst the value of a typical bridging loan is lower in the North than it is in the South2, and there is continuing increasing demand in London, this data shows that the use of bridging finances for property investment is becoming more widespread in the UK.
This means that your property does not need to be in a prime central London position for your application to be considered.
Can I get a bridging loan without security?
Most lenders would not be willing to take a view on a bridging loan application without any form of security, due to the high risk and short-term nature of the lending.
Can I get a bridging loan as a first-time buyer?
It is unlikely that a bridging lender would take a view on an application from a first-time buyer. Bridging loans require security, and a specific exit strategy, most commonly the sale of an unencumbered property after the funds are released to the borrower. It is unlikely that a first-time buyer will have both requirements.
You can read more about getting a regular mortgage as a first-time buyer here.
In these cases, however, your application may more likely be successful if you seek professional advice and engaging a specialist mortgage broker to help you arrange the borrowing.
Can I get a bridging loan in later life?
This may be an option depending on your circumstances. However, it is important to note that the borrowing you can achieve is dependent on your circumstances.
The average age of a bridging customer is 56, compared with 37 for a standard mortgage.5 One reason for this trend could be that traditional lending in retirement is generally harder to come by, due to strict affordability testing. Therefore, a need arose for older borrowers to search for other options in the mortgage market, which is where bridging came into the picture.6
There are various reasons to take out a bridging loan when in later life. Many people in or nearing retirement look to sell their current property and downsize. A bridging loan enables them to purchase a new home, without having the pressure to sell their old home to fund the purchase. This means that they can sell their old home at a time which is best for their personal circumstances.7
How do the rates differ to a regular mortgage?
Rates for bridging loans are generally higher, due to the short-term nature of the funding. Despite this, some market commentators have gone so far to say that bridging loans are now so competitively priced, that they should, in some instances, be the first port of call, instead of a regular mortgage, for property investors looking to move quickly.8
In some cases, you can defer your interest repayment if needed. It may be possible to roll up your interest payments and add them to a new mortgage.9 This means that instead of paying the interest monthly, it is accrued until the end of the loan term. All the interest accrued is then added to the total loan amount when the mortgage is due to be repaid. Some borrowers choose to do this to secure better terms on the new mortgage.
Will I have to pay administration fees?
The answer is yes. As rates can be higher for a bridging loan than a regular loan10, it is always important to remember to factor into your budget any administration fees payable.
You can expect to pay the following fees:
- Lender fees
- Property valuation fees
- Legal fees
- Broker fees
Has the bridging industry in the UK been affected by Brexit and the ongoing negotiations?
The Association of Short Term Lenders (ASTL), have commented that the bridging finance industry is in good shape going into 2018, which is good news, despite the challenges to the British economy caused by Brexit uncertainty and the squeeze on affordability with slowing wages.11
The statistics support the comments from the ASTL that the bridging market has not been negatively affected by the 2016 referendum; it is, in fact, thriving despite it.
(Source – Financial Times)
Benson Hersch, CEO of ASTL, further comments that the bridging sector provides a vital role in the UK economy, by offering customers access to the capital they need in a responsible and sustainable way.”12
Therefore, there is no reason to delay your bridging enquiries until Brexit negotiations are settled, with now being a potentially good time to secure great rates and terms from bridging lenders.
How do I find an appropriate lender?
Competition in the bridging market has pushed lenders to be more innovative with their product design, and to sculpt loans which precisely meet the needs of the borrower, rather than expecting them to fall within a ‘one-size-fits-all’ approach.13 This means that lenders, in particular, Private Banks, will assess cases on an individual basis, and tend to offer increasingly flexible lending terms and affordability criteria.
Specialist mortgage brokers have experience working with bridging clients with complicated circumstances, and relationships with many Private Banks and niche lenders. A broker has the specific market knowledge to be able to source an appropriate lender, negotiate terms and rates on your behalf and provide bespoke bridging loan solutions.
They will advise on a diverse range of finance solutions that suit your requirements and allow you to achieve the borrowing required to finance your property purchase or refurbishment.
A specialist mortgage advisor will also be able to go through all the documents required by the lender with you and assist in completing these if needed.
A bridging loan is a niche product which needs to be carefully considered, and it should not be viewed merely as an alternative to mainstream lending.14 A specialist mortgage broker will be able to talk through your options and help you to weigh up which finance route is best for your personal circumstances and future financial plans.