USING A BRIDGING LOAN FOR PROPERTY PURCHASE -INVESTORS GUIDE
David Barr
November 25th 2021
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You’ve found a property you really want to buy to add to your investment portfolio, hopefully, one of ours! You give us a call, initially indicating you want to get a Buy To Let mortgage to purchase the property, but we’ve had another interested party willing to purchase with a bridging loan.
In this situation, we’re always going to choose the bridging loan. As our Investment Sales Manager, Andrew James, so quaintly put it “people who get the best deals are the people who move the fastest”.
It’s an unfortunate fact – time is money and bridging loans offer the same speed as cash buyers.
But what are they, how should you use them, how do they work and what are the main differences when compared to a mortgage? Welcome to our guide to Bridging loans!
A bridging loan is a short term solution to borrow money to help bridge the gap between buying a new home before selling your own, or at least that’s the traditional use. A bridging loan for investors can be used to buy the best deals quickly, beating Buy To Let mortgage buyers which can take months to approve.
There are two types of bridging loans, closed loans which have a fixed repayment date and open loans which have no fixed repayment dates although you are usually expected to repay it within a year.
Bridging loans are a method of buying a property, and then refinancing with a longer-term solution.
Every investor always wants to buy a property with a buy to let mortgage, it’s the most affordable way of expanding your property portfolio. On our side of the fence, we sell a property a good amount of discount with the aim of selling them quickly, investors looking at bridging loans can buy far quicker than those wanting to mortgage.
A bridging loan essentially allows you to beat the rat race and get the best property deals. There are quite a few reasons you might buy a property with a bridging loan:
- Moving quickly – You’re basically as quick as a cash buyer, bridging loans are very quick to get approval.
- More flexible – It’s a loan that is taken against the value of the property you’re buying, so there generally more flexible when it comes to loaning the money and don’t put as much weight into your credit score or income when compared to high street lenders.
- Finance unmortgageable properties – They can be used as a short term solution for properties that may not be suitable for a traditional mortgage. Take for example a property without a kitchen in need of renovation, you can get a bridging loan, do the refurb work, and then apply for a mortgage.
If you’re lucky enough to have the extra money to buy a property outright to then refinance at a later date then you might be wondering how bridging can actually help you.
It really depends on you, but if your goal is to grow your property portfolio as quickly as you possibly can, bridging loans are the way to do it.
If you buy a property outright for £100k, you’re tying a lot of money up into the one property. The deposit on a bridging loan is between 20-25%, so you can easily spread your £100k between 4 properties.
Then refinance them afterwards & go again!
Bridging loans are meant for a short period fix, so people often only take them over a few months and therefore they’re costed like that.
They’re quite expensive, and you could be looking at anywhere from 0.5% to 1.5% of the loan amount per month – it’s far higher than any mortgage and there is also usually a setup fee that you will have to take into account, which can be anywhere around the 2% mark of the overall loan.
They are expensive, there’s no getting around that, but you’ve got to remember you’re paying more in the short term for getting a better percentage below market value deal on a property – which will usually work out far more beneficial.
The sky is the limit with bridging loans, well, if the sky was around £25m. Realistically the amount you can borrow depends on the bridging company that you go to – which is something that we can help you with if you’re looking to buy a property with us.
Most bridging loans will require you to have a certain LTV (Loan To Value) ratio, which is typically around 75% of the properties value.
Just to recap, there are a number of reasons that a bridging loan can be useful in certain situations, so let’s touch on some of the main aspects and features about what makes a bridging loan different to a mortgage.
Short term option
We can’t stress this enough, bridging loans are a short term option to buy you time to find a longer-term solution. You can’t use a bridging loan to finance a property purchase, and not have an exit strategy. As long as you use bridging loans in the correct way, they are completely safe and can be a great tool.
All the speed of cash, without having to tie up all your money
Bridging loans are just as quick as cash, the process of getting the money is very fast and you can use that to your advantage in order to jump in and get the best property deals – the discount you’ll get by being able to act quickly to purchase a property is likely to outweigh the cost of a bridging loan significantly.
You can often defer interest
Depending on the agreement in the first place, you can roll up your interest to pay at the end of the term of finance, which means that you can use your Buy To Let mortgage loan to pay off the cost of the property & cover the costs of the bridging loan.
As we’ve touched on throughout, the whole process of getting a bridging loan is quick – that’s the idea of it! Here’s a rundown of the process:
- Initial enquiry to the selected bridging company
- They will provide you with an offer and documentation around a loan
- The next stage is that normally they will be a valuation conducted on the property and legal work
- They’ll release the funds which can be transferred to your bank or straight to the seller of the property
It’s a lot more straightforward and simple than getting a Buy To Let mortgage from a high street bank.
One major thing that you’ll need if you are planning on getting a bridging loan is an exit plan. This plan needs to be agreed with the lender beforehand – it details a plan on what you intend to do in order to repay the loan giving assurance to the lender.
As part of this, you will have to detail a deadline for this to be completed, and your lender will keep in touch with you around this and whether everything is going to plan – they usually get in touch with you a few months before the end to discuss whether you’re going to meet the deadline or if you need to arrange a short extension.
We’ve touched on the main aspects of bridging loans for financing your property purchase, but what are the pros and cons of using a bridging loan?
Pros
- It’s quick to arrange
- It allows you to spread your money over more properties
- Available for a wider range of properties
- There isn’t an exit fee or early repayment fee
- You’ll be able to purchase the best property deals due to the speed in which you can buy
Cons
- There are higher fees to consider
- It’s unregulated and not protected by the FCA
- The interest rates are high, so they shouldn’t be seen as a long term solution
EXAMPLE OF A BRIDGING LOAN
A lot of people query the costs of a bridging loan, which as we mentioned are typically quite high when compared to mortgage repayments, so let’s take a look at an example of property worth £100k, just to make it easy.
- Current property value: £100k
- Deposit: £25,000
- Agreement fee (1.5%): £1,125
- Term: 6 Months at 0.85%
- Total interested on term: £3,882
The total cost of the bridging loan would be £5,007 over the 6-month duration.
In the past bridging loans have been seen in a negative light, much like any short term loan, but nowadays the companies offering these are far more reputable. Bridging loans also need to be done through a limited company, so you’re assets, apart from the property you purchase are protected.
What you always need to remember is that bridging loans are a short term solution, you should always look to refinance. If used correctly, they can be a really powerful tool to allow you to jump on the best possible deals and acquire properties quickly.
Start your property portfolio today!
You’ve found a property you really want to buy to add to your investment portfolio, hopefully, one of ours! You give us a call, initially indicating you want to get a Buy To Let mortgage to purchase the property, but we’ve had another interested party willing to purchase with a bridging loan.
In this situation, we’re always going to choose the bridging loan. As our Investment Sales Manager, Andrew James, so quaintly put it “people who get the best deals are the people who move the fastest”.
It’s an unfortunate fact – time is money and bridging loans offer the same speed as cash buyers.
But what are they, how should you use them, how do they work and what are the main differences when compared to a mortgage? Welcome to our guide to Bridging loans!
A bridging loan is a short term solution to borrow money to help bridge the gap between buying a new home before selling your own, or at least that’s the traditional use. A bridging loan for investors can be used to buy the best deals quickly, beating Buy To Let mortgage buyers which can take months to approve.
There are two types of bridging loans, closed loans which have a fixed repayment date and open loans which have no fixed repayment dates although you are usually expected to repay it within a year.
Bridging loans are a method of buying a property, and then refinancing with a longer-term solution.
Every investor always wants to buy a property with a buy to let mortgage, it’s the most affordable way of expanding your property portfolio. On our side of the fence, we sell a property a good amount of discount with the aim of selling them quickly, investors looking at bridging loans can buy far quicker than those wanting to mortgage.
A bridging loan essentially allows you to beat the rat race and get the best property deals. There are quite a few reasons you might buy a property with a bridging loan:
- Moving quickly – You’re basically as quick as a cash buyer, bridging loans are very quick to get approval.
- More flexible – It’s a loan that is taken against the value of the property you’re buying, so there generally more flexible when it comes to loaning the money and don’t put as much weight into your credit score or income when compared to high street lenders.
- Finance unmortgageable properties – They can be used as a short term solution for properties that may not be suitable for a traditional mortgage. Take for example a property without a kitchen in need of renovation, you can get a bridging loan, do the refurb work, and then apply for a mortgage.
If you’re lucky enough to have the extra money to buy a property outright to then refinance at a later date then you might be wondering how bridging can actually help you.
It really depends on you, but if your goal is to grow your property portfolio as quickly as you possibly can, bridging loans are the way to do it.
If you buy a property outright for £100k, you’re tying a lot of money up into the one property. The deposit on a bridging loan is between 20-25%, so you can easily spread your £100k between 4 properties.
Then refinance them afterwards & go again!
Bridging loans are meant for a short period fix, so people often only take them over a few months and therefore they’re costed like that.
They’re quite expensive, and you could be looking at anywhere from 0.5% to 1.5% of the loan amount per month – it’s far higher than any mortgage and there is also usually a setup fee that you will have to take into account, which can be anywhere around the 2% mark of the overall loan.
They are expensive, there’s no getting around that, but you’ve got to remember you’re paying more in the short term for getting a better percentage below market value deal on a property – which will usually work out far more beneficial.
The sky is the limit with bridging loans, well, if the sky was around £25m. Realistically the amount you can borrow depends on the bridging company that you go to – which is something that we can help you with if you’re looking to buy a property with us.
Most bridging loans will require you to have a certain LTV (Loan To Value) ratio, which is typically around 75% of the properties value.
Just to recap, there are a number of reasons that a bridging loan can be useful in certain situations, so let’s touch on some of the main aspects and features about what makes a bridging loan different to a mortgage.
Short term option
We can’t stress this enough, bridging loans are a short term option to buy you time to find a longer-term solution. You can’t use a bridging loan to finance a property purchase, and not have an exit strategy. As long as you use bridging loans in the correct way, they are completely safe and can be a great tool.
All the speed of cash, without having to tie up all your money
Bridging loans are just as quick as cash, the process of getting the money is very fast and you can use that to your advantage in order to jump in and get the best property deals – the discount you’ll get by being able to act quickly to purchase a property is likely to outweigh the cost of a bridging loan significantly.
You can often defer interest
Depending on the agreement in the first place, you can roll up your interest to pay at the end of the term of finance, which means that you can use your Buy To Let mortgage loan to pay off the cost of the property & cover the costs of the bridging loan.
As we’ve touched on throughout, the whole process of getting a bridging loan is quick – that’s the idea of it! Here’s a rundown of the process:
- Initial enquiry to the selected bridging company
- They will provide you with an offer and documentation around a loan
- The next stage is that normally they will be a valuation conducted on the property and legal work
- They’ll release the funds which can be transferred to your bank or straight to the seller of the property
It’s a lot more straightforward and simple than getting a Buy To Let mortgage from a high street bank.
One major thing that you’ll need if you are planning on getting a bridging loan is an exit plan. This plan needs to be agreed with the lender beforehand – it details a plan on what you intend to do in order to repay the loan giving assurance to the lender.
As part of this, you will have to detail a deadline for this to be completed, and your lender will keep in touch with you around this and whether everything is going to plan – they usually get in touch with you a few months before the end to discuss whether you’re going to meet the deadline or if you need to arrange a short extension.
We’ve touched on the main aspects of bridging loans for financing your property purchase, but what are the pros and cons of using a bridging loan?
Pros
- It’s quick to arrange
- It allows you to spread your money over more properties
- Available for a wider range of properties
- There isn’t an exit fee or early repayment fee
- You’ll be able to purchase the best property deals due to the speed in which you can buy
Cons
- There are higher fees to consider
- It’s unregulated and not protected by the FCA
- The interest rates are high, so they shouldn’t be seen as a long term solution
EXAMPLE OF A BRIDGING LOAN
A lot of people query the costs of a bridging loan, which as we mentioned are typically quite high when compared to mortgage repayments, so let’s take a look at an example of property worth £100k, just to make it easy.
- Current property value: £100k
- Deposit: £25,000
- Agreement fee (1.5%): £1,125
- Term: 6 Months at 0.85%
- Total interested on term: £3,882
The total cost of the bridging loan would be £5,007 over the 6-month duration.
In the past bridging loans have been seen in a negative light, much like any short term loan, but nowadays the companies offering these are far more reputable. Bridging loans also need to be done through a limited company, so you’re assets, apart from the property you purchase are protected.
What you always need to remember is that bridging loans are a short term solution, you should always look to refinance. If used correctly, they can be a really powerful tool to allow you to jump on the best possible deals and acquire properties quickly.
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