Most property investors rely on mortgages to purchase properties. Bridging as a means of financing a purchase tends to be treated with suspicion; it’s unknown territory.
The problem is that most people take their knowledge of mortgages and apply it to bridging and that’s where disaster lurks! Here are five core facts about bridging.
With a mortgage, the lender’s current fixed rate applies nationwide, whether you’re buying a property in London or Carlisle. Bridging doesn’t work like that!
There is no set interest rate for a deal, each deal is priced on perceived risk. This means that the same bridger may give different rates for different deals. This doesn’t mean that they negotiate each deal, they simply look at the property and decide what the risk is in relation to getting their money back.
Unlike mortgages, bridging relates the risk to the property, rather than the borrower’s credit record.
Every bridger is different. Bridging lenders tend to be relatively small businesses, despite the fact that they manage significant amounts of money. That means that much of the time they restrict where they lend to a preferred geographical location.
If you apply for a mortgage, the lender will tell you the repayment term – whether that’s 10, 15 or 25 years.
Bridgers don’t tell you how long the term should be – you tell them how long you need the money for. If you underestimate that, then when the term expires, if you’re not in a position to repay, you incur penalty charges. This means that the monthly interest rate could jump up to as much as 3% a month.
A bridger won’t question your estimate of the time you want the loan for, they expect the borrower to know what’s feasible.
If you have a hot property with a highly-motivated vendor, being able to complete quickly can often be the clincher in getting in ahead of other buyers. It can also be a useful tool to negotiate a discounted price, especially where unmortgageable properties are concerned. This is where bridging wins out over traditional mortgages.
Completing in 28 days is well within your grasp. Actually, we’ve had situations where we’ve turned around a bridging loan for clients in less than a week, although this is not the norm and all your ducks have to be very lined up to achieve this.
The only proviso is that you will need a commercially-minded solicitor who understands the needs of bridging. Be prepared to pay more for this as there is more conveyancing work for a bridging loan than for a mortgage. This is not a situation to be penny pinching and looking to do it on the cheap.
Usually a property has a value, but a smart property investor will always try to get a better deal. So if you agree a price of £150K with the vendor on a property worth £180K, happy days!
When you apply for a mortgage, the mortgage lender will lend you 75% of what you are actually going to pay – so you need a 25% deposit – and some bridgers do this too. However, there are bridgers that are prepared to lend on the actual value if that’s higher than the purchase price. A few bridgers will lend on the ‘done up’ value too. There are even some bridgers who will lend refurb money as well.
There are even a small number of mortgage lenders who also offer bridging. They will lend as a bridging loan and also offer the mortgage at the back end if needed.
For the inexperienced investor getting enough knowledge to make an informed choice about the right bridger can be an intimidating experience.
One miscalculation based on insufficient knowledge can be expensive.
Choose your broker carefully; a fantastic mortgage broker, doesn’t necessarily know a lot about bridging. You need a broker who is dealing with bridging on a daily basis. If you don’t have the experience you need a broker who can mentor you through your deal.