Bridging Loan For House Purchase
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Bridging Loan For House Purchase
Bridging loans for house purchase – explained by Richard from Rose Capital.
Can you use a bridging loan for a mortgage?
Yes, and in fact any loan secured on property is by definition a mortgage – so a bridging loan is just a type of mortgage. With bridging finance, from the very start we look at ‘the exit’ which is if you’re going down this path, how do we pay this loan off? If we can’t satisfy ourselves that we’ve got a good exit in place, we won’t even entertain doing a bridging loan.
But you can absolutely do this. It tends to be shorter term by nature so it’s a loan that’s in place typically from six months to 24 months – possibly shorter, but typically no longer.
I’ll expand on the specific reasons, but typically you would do this because the high street can’t step in for whatever reason or you need to move extremely quickly.
Why would you use a bridging loan?
The reason bridging loans came about in the first place was for a non-sequential purchase. A simple example – I’m selling my property and I’ve fallen in love with a house I want to buy. But mine hasn’t sold.
A bridging loan would typically step in to secure the property you want to move to – potentially secured against my property. Then when my property sells, the short term loan would be repaid.
Another common example is an auction purchase. Auctions can be online or in person. You put your bid in, and if you’re successful, you’d put down 10% of the property value on the day. If you don’t complete within 28 days you forfeit your 10%.
That’s why bridging finance exists. If you need to move very quickly it makes more sense to pay a slightly more expensive cost in the short term than jeopardise the 10% or the loss of the property.
The third reason you might want a bridging loan is when a property is not mortgageable. Banks have rules around a property being habitable or not. It’s not about being up to spec or modernised, it’s about whether there are running utilities.
If the electrics don’t work or the plumbing is not correct, or there’s damp or structural issues, high street lenders will not accept that property. But it can be a great potential investment – you could buy the property with the bridging loan, get it up to standard and then get a conventional mortgage. If you’re willing to go through that process you can make quite a lot of money.
Who can get a bridging loan for a house purchase?
Pretty much anyone, because this goes back to the exit plan. It’s a case of what you are doing next. It could be downsizing, particularly in a situation where you’re in a chain and one of the buyers pulls out. A bridging loan can be a good place to use to avoid the chain breaking.
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How much deposit do I need for a bridging loan? How much could I borrow?
With a bridging loan, unlike a conventional mortgage, the amount you earn is secondary. They’re not really concerned with your income – it’s primarily about two things, the security and the equity. What are they lending on, and what’s the value?
In minimum terms, you probably need a 25% deposit. In the example of a non-sequential purchase, say you own a £500,000 property with no mortgage, and you want to buy a £1 million pound property, but your income would only support say a £500,000 loan.
You could secure a bridging loan on both properties. In total the bank has £1.5 million pounds of security. They advance you £1 million so they’re lending around 66% – it’s well under that 25% bracket. They will be really happy to do that.
Then, once your property sells you pay £500,000 of the loan off and then take a traditional mortgage for the remainder – that’s what you could afford on your income. This is why we focus on the exit. We need to know, can we get you a mortgage at the end of this?
Downsizing is a big thing as well. It might be that once your property sells, you have no mortgage whatsoever. That’s a great exit. Or maybe you’ve got inheritance coming and you don’t want to sit around. It’s going through probate. Or there may be another ‘liquidity event’ coming – selling a business, selling shares or other assets.
As long as you’ve got recourse to pay it back, that’s when a bridging loan really works. So we work out how much deposit you need and the exit to see if it works.
Do you pay stamp duty on a bridging loan?
Again the rules change over time but as we stand in May 2023, if you’re buying another property and retaining your first one, you will currently be charged the 3% surcharge on top of the normal stamp duty rate. That is refundable at the moment. So if you sell your first property within a year or so you’ll get that refunded back to you.
In the example I gave – the £1 million pound property – if you’ve got £100,000 worth of fees, the bank might advance you £1.1 million in a loan. You can effectively add that onto the loan.
Because of the way bridging loans work, there’s no monthly interest to pay, but interest is accumulating in the account each month. So do borrow the minimum because that accumulates very quickly. Paying interest on interest gets very expensive.
So while you can add fees and stamp duty, just be mindful of the total cost. This is something we sit down with our clients and work out. We certainly urge people not to borrow more than they need to because it is relatively expensive.
How do I get a bridging loan for a house purchase? How fast can they be arranged?
The process is the same as any mortgage. We sit down with our clients to do a fact find, then we identify solutions. Sometimes a client comes to us and says ‘I need a bridging loan’ and we might work out that they don’t – there’s something else we can do.
Or, a client might not have considered bridging finance and we will suggest it. We make our recommendations and research by looking at it in the round. Then we’ll do our research, and apply. We usually need some documentation but it’s standard stuff, because this is so heavily led by the property itself.
The survey is the key thing here. A lot of bridging companies do desktop valuations these days. If you’re borrowing a lower percentage of the property – something like 60% or less – they can move extremely quickly with a desktop valuation, rather than sending a physical surveyor round.
It can move really quickly. I always say that there are three types of service: good, fast and cheap – but you can only have two of those at a time. If it’s good and fast, it’s not cheap. If it’s fast and cheap, it’s probably not good.
Most bridging companies will get a mortgage offer issued in one to two weeks – that’s pretty standard. If we did need to do things in days, it’s possible, but it won’t be the cheapest pricing on the market.
The cheapest providers are the busiest, but you can normally get an offer in a couple of weeks. Once that’s done there’s a bit more legal work to go through. But earlier this year I did get a bridging loan from the point of application to the client’s hands in three weeks. We typically find the legal work takes four to six weeks. That takes more time than the actual bridging loan itself.
What are the advantages and disadvantages of using a bridging loan for a house purchase?
On the pro side is speed, which we just spoke about. There’s also flexibility – if you don’t tick the boxes on a high street mortgage but you spot an opportunity, this is a way around it.
In a situation where you want to buy without selling a property, you might not fit the criteria of a traditional lender. Or perhaps the property is not mortgageable but presents a really good investment opportunity. So speed, flexibility and investment upside are the major advantages.
On the cons, bridging is a bit more expensive. It does depend on timing and your profile as to what pricing you’ll be offered. You don’t have to make monthly payments which is positive, but it doesn’t disappear. Your monthly interest is added onto the balance each month. After a while you’re paying interest on interest, so it can get very expensive.
That’s the expense around bridging finance – it’s not so much the actual interest rate because at the moment that’s not too far off high street rates. It’s expensive in terms of compound interest – for that reason it’s risky. That’s why the exit is so important. How long is it going to take? What’s the balance going to be at that point? What’s the probability of that exit happening? How much control have we got over it?
If I can’t see a clear exit or if I can’t control the exit I wouldn’t even go down this path. We do sometimes tell people not to take a bridging loan. But if you get it right it works. We’ve got clients who’ve built phenomenal property portfolios by buying undervalued properties that aren’t mortgageable. The upsides are there, but you need to know what you’re doing.
How do I repay a bridging loan?
That comes back to the exit, whether you are selling other assets and what time frame you have to do it in. If we can tick all those boxes, brilliant. We’re good to go.
I mentioned the rolled up interest before – just be mindful of that. When you get an illustration from us we will explain it. You really want to do this in the shortest term possible.
There’s a massive upside on renovating a property and for an investment, it’s all in the business case. What we look at is the Gross Development Value – if you’re buying a property for £1 million pounds, doing £200,000 of work to make it worth £2,000,000, even if you spend £100,000 in interest it makes sense. You’re still making £700,000
A lot of people do this for house purchases because they can renovate a properly before they move into it and get their ideal home. They can sell their current property to repay the loan and it’s all quite self-financing. But just go into it with your eyes open.
What else do we need to know about bridging loans?
By virtue of us being a broker and the relationships we have, we have access to banks and products that do not deal with the public. This is risky, it’s complicated and banks don’t often want to take the advice process on. They’re happy to outsource that.
We will find the most suitable lender and present you as the client. We’ve got lots of tools and models we can play with you to explore if the deal makes sense. We can show you how this all works and break things down to specific numbers.
Some banks charge a survey fee or a legal fee. There are hidden administration fees. We strip all that out so you know how much you will spend over the timeframe. We find the most appropriate lender, agree the exit and then hopefully get your dream property and your investment desires fulfilled.