You found a great property investment, but now you’re wondering what is the best way of funding this deal to make sure you secure it, get it through, and make as much money as possible? Well, one way of doing that is something called bridging and in this article, I’m gonna be breaking down what it is should you be doing it, and the risks and pitfalls you should be looking out for. Let’s jump straight in. You found the property investment of a lifetime and you want to guarantee that you do not lose this deal. One of the best ways of doing that is with bridging finance, one of the fastest ways of getting finance in, but there are risks to look out for.
In this article, we’re gonna be breaking down what it is, the pros and cons, and everything you need to know before jumping straight into your next bridging property. I used to watch homes under the hammer and one of the things that Martin and Lucy used to say all the time when people got bridging is do not get bridging. And actually, I completely disagree. I think there is a time and a place. Bridge in finance is a fast short term way of financing your properties and in the clue is in the name, bridging.
It is to bridge to your long term financial assets and so in terms of property a mortgage. Bridging is an opportunity to secure uninhabitable property, probate properties, ones that need a load of work to it. Anything to do with speed and creativity, the computer says yes with bridging when it says mortgages. But there’s a few things you need to take account of. How does bridging work?
As I said, bridging is, says it in the name, a bridge towards your exit, I. E. Your mortgage normally. So when you’re purchasing a property you’re gonna need to look at your finance options. Most people either buy with cash, probably about 40% of people and then the rest and majority will purchase with a mortgage, but there are some properties where a mortgage won’t be good enough.
This is usually because the condition of the property, I. E. It’s uninhabitable so you can’t get a mortgage on it, or the speed in which that the property needs to complete. So, somebody might agree to sell you their £100,000 house for £80,000 on the basis that you complete within 2 weeks. A mortgage is going to take too long whereas bridging you can make that happen.
So it’s a fast finance route. It’s very similar to a mortgage in that they will send out a RIC Surveyor to value the property. They will send them out. Let’s say it’s worth a £100,000 then you agree the price. Let’s say at 80,000 and they will say, yes, it is worth a 100,000.
We will loan you however much they will loan you. Typically with bridging is 70% loan to value. What this means is whatever the property is worth they will typically loan you 70% of. That’s a massive plus compared to mortgages that they say loan to value but the reality is loan to purchase price. What I mean by that is if it’s bridging and it’s worth a 100,000 70 percent of that is £70,000.
They will give you £70,000 towards a purchase and then you have to pay the top up. With a mortgage, if you were buying at £80,000 they will normally give you a better loan to value, loan to purchase price usually 75 percent But they will actually do it on what you’re purchasing at so they will do it at 75 percent of the 80,000 which is 60,000 meaning that you will have to put in that £20,000 gap. So it’s a massive benefit of this The difference in the process of bridging versus mortgage is number 1 you have an account manager so the speed of the transaction The only The only other thing that you need to be aware of during the legal process is that they will have separate rep. What this is what this means is separate representation. I the lender will have a lawyer working on their behalf so there will be 3 legal teams in the transaction.
Your solicitor representing you as a buyer, the vendor’s solicitor representing them as a seller, and then a solicitor representing the lending company and protecting their interest. The things that I love about bridging is speed and it’s certainty. So when you’re taking on these boring vanilla bite to let, you can actually take on more exciting projects at the start of them that maybe they’ve got some structural issues, some Japanese knotweed or indeed nobody can actually live in them so you’re gonna have to move quickly to get these discounts. So you can get the admin done in around 14 days, you get quick decisions, and as I said, you’ve got somebody on the other end of the phone ready to make a computer says yes decision because of the human input, but there are some downsides. Three big negatives that I find with bridging.
Number 1 is the hidden fees. So a lot of people look at interest rates which I’ll touch on in a moment and they try to get the lowest interest possible but actually they can end up paying more on that. Well, what the hell do you mean Jamie? That makes no sense. Well, yes, it does.
So you can have interest rates of 0.4, 0.5 percent a month, but actually the 1% a month would have been cheaper. The reason is people have the entry fees, the exit fees, the management fund contracts, and the solicitor fees, and default fees, all of these things add up. So, people would have thought they’re paying 0.5% for bridging for 6 months, you think, okay, great. 6 months at half a percent a month, that’s 3%, right? No.
They also had a 2% entry, a 1% exit, and then around 2% fees in the middle. So, they end up paying closer to 2% per calendar month. So, you must look out for those hidden fees. Number 2 is the interest rates in general. A mortgage right now I can get for about 3% per year whereas the real cost and I mean fees all in we’re probably paying around 1% per calendar month for this.
So it’s something to take in account of that you must make sure it’s a really solid deal to move forward with. Finally, mentioning fees is the default fees. When I talk about bridging the most important thing which I’ll touch on more is the exit. How am I exiting and getting away from the bridging line? Because as I said, it’s a bridge to something not the road to that.
So you need to get on it and off it as quickly as possible. If you don’t have a secure exit through a sell or a refinance, you may go into default territory and this is in the small print of the contracts that can go from that very friendly 0.5 percent a month to over 8% per calendar month. That is a 100% interest per year. Look for the small print it will get you. Some things to consider.
Number 1, make sure you’ve got everything in place so all of your costs are in one place, not just your interest payments but, as I said, your entry costs, your exit costs, your separate representation and that will give you an accurate understanding of the full fees and interest payments you’re going to pay on this property. Number 2, make sure you’ve got your exit in place. Whether you’re selling on or you’re refinancing, you want to make sure that you’ve got full confidence within this on your way out to make sure that you are maximizing your profits within this. A good idea with this is something called Bridge To Let. So this is quite a unique product, there’s a few lenders that are doing this right now, Aldermore, you’ve got Cambridge, and Birmingham Midshires.
Have a look at those because what you can do is actually reduce your risk. The way that this works is as a bridging company they will agree to purchase the property or fund the property but also what they’ll do is give you an indication of what they will value the property at of the refurbishment and then guarantee you a refinance on their mortgage product. Now, the downsides of this is they might down value the end a little bit, but it also gives you a lot of confidence understanding that you can bridge it with them, refurbish it, and then refinance at a rate that they have agreed reducing your risk. The final thing that I’d like to take account of is risk sensitivity analysis. So whenever I’m doing anything on riskier finance models like bridging I always want to do some sensitivity analysis.
What I mean by this is if everything went wrong by 10%, I. E. The refurbishment went up 10%, the cost went up 10%, the timeline went up 10%, would it still be a financially viable project? And for me, if it were financially viable at that point I’d probably move forward and say yes to going forward with bridging. Do I think bridging is worth the risk?
Yes, I do. I’m sorry Lucy, I’m sorry Martin, but I really do think it’s a great opportunity, but you need some top tips with this. Number 1, do not go for weird properties. And what I mean by that is if it’s a weird shape we bought a property once that had these triangle rooms and we thought it’s such a great price, but actually it was a ball late exit on the other end. Now, we actually bought that cash but if we bought with bridging those costs would start tallying up number 2 look at the surrounding areas there anything weird about it a poor property down in Mansfield that the property itself was absolutely perfect, but it had a tank next door on the front garden.
This, this guy that owned it owned a load of army paraphernalia, had tanks, weapons, and everything. Apparently, people don’t like living next door to that. Who knew? Made it really hard to exit it and actually end up costing us a lot more. Still made profit but the risk is there.
And, finally, unless you know a lot about Japanese knotweed and non standard construction just stay away from it. There’s a great opportunity to make money there, but unless you know the ones that can get funded from a mortgage or refinance and the ones that don’t, just keep away from it. Keep it simple, keep it boring, vanilla, bite alerts. It’s what I love and it’s what’s gonna make you the most money.