What is bridging finance, and how much does it cost? In this guide, we take it back to basics and look at how to use bridging finance to boost your property portfolio.
What is bridging finance?
Bridging is a short-term finance you can use when you need to access funding quickly. This type of finance is used to “bridge the gap” until you can exit onto the next stage of finance or sell the property to repay the loan. Auction and refurbishment finance are types of bridging finance.
How does bridging finance work?
Bridging vs. buy to let mortgages
The main difference between bridging finance and standard buy to let mortgages is the time it takes to secure the loan. Whilst it can take a few months for a typical buy to let mortgage to complete, bridging loans can, in some cases, be ready in a matter of days.
Mortgage repayments
Lenders charge interest monthly for the required loan term, but understand that during this period, you’re most likely not earning anything from the property (if it’s an investment property). Therefore, both the capital and interest repayments are rolled up and repaid when the loan is redeemed.
In some cases, lenders will consider allowing you to make repayments during the loan term upon receiving evidence of your experience with bridging finance.
Loan to value (LTV)
With bridging finance, lenders can calculate your LTV using one of three values: the purchase price, the open market value, or the gross development value (GDV).
The value the lender uses will dictate how much you can borrow. Therefore, it’s essential to work with an expert broker to have the best chance of securing the loan you need.
Of course, the more you borrow, the higher the interest charges you pay, which you will need to factor into your total project costs.
What is a bridging finance ‘exit strategy’?
Your exit strategy is one of the most important factors your lender will consider when assessing your bridging finance application. Before they provide you with a loan offer, they need to know how you plan to repay the loan.
The most common exit strategies are refinancing onto a standard mortgage (buy to let or homebuyer) or selling the property.
Selling the property is a common exit strategy for those “flipping properties”. If this is your plan, you’ll need to carefully calculate your Gross Development Value (GDV) once you’ve refurbished the property, ensuring the uplifted value will cover your bridging finance (including interest and fees), and enough to make you a profit.
When should I use bridging finance?
Bridging finance has many uses for landlords and homeowners alike, such as:
- Auction finance
- Renovations or refurbishments
- Purchasing unmortgageable properties
- Quick access to funds
- Preventing a chain break
This is not an exhaustive list, but it gives you a good idea of the types of opportunities you can access by using bridging finance.
How do I secure a bridging loan?
The very first step is to discuss your plans with our expert mortgage brokers. We’ll compare the rates available to you to find the best deal and lender to suit your property finance needs. We’ll present all your details, including your exit strategy, to the lender.
Your lender will issue an offer based on the property details and how you plan to use the finance. A valuer will complete a valuation report and send it to your solicitor. Once you fully understand the terms and conditions of the loan, you will sign all the documentation and wait for the funds to be released to the solicitor for legal completion.
How long does it take to secure bridging finance?
The process from start to finish will typically take between 7 to 28 days. However, this depends on several factors, such as the complexity of the case. Bridging finance can be secured in just a few hours, or it may take more time to complete, particularly in the case of more complex development projects.
Are bridging rates more expensive?
Whilst the rate you will access with bridging finance is much lower than that of standard buy to let rates, the overall cost is more expensive. For standard cases, bridging rates are typically from 0.5% to 1.5% per month. However, as the interest is rolled-up, this cost quickly adds up if you have a longer loan term.
What are the costs associated with bridging finance?
The other fees to consider with bridging finance include, but are not limited to:
- Lender arrangement fees – typically 1-2% of the total loan amount
- Legal fees
- Valuation fees
- Administration fees
- Exit fees
Bridging finance for buy to let landlords
Bridging finance is a versatile finance option for landlords looking for new opportunities to diversify their property portfolio. By working with our experts, we can find you the best rate to suit your needs and discuss your plans to boost your portfolio profits.
Next Steps
For your next steps in your bridging finance application, or if you have any further questions, get in touch with our team on 0345 345 6788 or submit an enquiry here.
