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Our MD Daniel Condren talks about Bridgin Loans. Watch below
Daniel Condren from One Mortgages joins the Mortgage and Protection Podcast to answer your questions on bridging loans.
What is a bridging loan?
A bridging loan is a specific type of loan where you are borrowing money to purchase a property very quickly. Typically it is ‘bridging’ a gap between selling your home and buying another one. Or it can just help you acquire a property very quickly.
Bridging loans are also useful to buy an auction property. A bridging loan can be over a period between six months up to two years – and sometimes can be extended longer. Generally it’s a form of short term mortgage.
In terms of auction property, anybody that’s in the development space or renovation refurbishment will often buy a property that’s run down. These types of property often don’t go through the normal sale process with an estate agent – they go to auction because the vendor just wants a quick sale.
In some auctions the price can actually go above market value because there’s so much opportunity for making money by renovating a home.
What’s the difference between a regulated and an unregulated bridging loan?
A bridging loan is typically in an unregulated space, but this is changing. Even commercial bridging finance deals are becoming more and more regulated. While your adviser might not be regulated to offer that advice, the lender treats you as a regulated customer these days.
That just means they go through due diligence and vet you as a customer to give them added protection.
In terms of the difference, with a regulated Mortgage you gain advice on the deal that you’ve been given – all the facts around the loan. You also have a lot more protection. Many types of commercial finance are business decisions so a lot of brokers and banks treat bridging loans as an unregulated deal.
At One Mortgages we treat all our unregulated options as regulated. That just means we go through the same process as a mortgage, try and get the best deal for the customer and review everything with them so that they understand all the details.
Can anyone get a bridging loan?
It depends on your specific situation. It helps if you have experience in property, and if you’ve owned a home before. I certainly wouldn’t expect a customer to come in and ask for a bridging loan to buy a £500,000 house and if they’ve never owned a property in the past.
The main requirements are a big enough deposit, a good credit rating and a clear plan about what you want to achieve and how you will repay the loan. That might be by selling the property, renovating the property or taking out a mortgage. Lenders will be more keen to support you if they can see that there will be a lot of profit from your plans.
What can bridging loans be used for?
They’re commonly used when a customer doesn’t have the funds to buy the property or renovate the property any other way. So they might buy a property but not have enough money to finish refurbishing it.
Or, you might not have enough money to acquire – you’re a little bit short of the full asking price. You might want to bridge that gap and borrow extra to pay for the renovation costs.
Not many people have hundreds of thousands spare to buy a property and renovate it. So this is a very good system to make a profit from property. That’s what the lender is going to look at in fine detail – have you estimated the right costs for the development, have you stated the right building materials, do all the numbers add up and is the renovation going to make money?
Very rarely do you get a deal accepted if your scheme is not going to make money. That’s the job of a broker – to find the lenders that are going to say yes and offer a good deal. Some lenders won’t budge on charges, rates and fees, while others will negotiate and compete with each other. There’s so many different deals out there, so trust in your broker to get you the best deal that they can find.
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How does bridging work – is it the same as a normal mortgage?
With a normal mortgage you’re probably borrowing the money over 25 years plus. It’s a long term plan and the lenders are fine with that. Meanwhile bridging loans can be anything from six months up to two years – it’s temporary. It’s there to let you buy a property, renovate it, sell or refinance it. It’s very common to refinance onto a normal mortgage such as a buy to let deal, and repay the bridging loan back with the profit they have made on the property value.
How long does it take to arrange one?
The quickest arrangement I’ve made took five days to release the funds – but that customer was known by the lender and they had a previous facility. But it can still be very quick. It depends how fast your broker is in getting the deal and how quickly the lender can look at the property. But generally it only takes a matter of days or weeks. Typically with an auction property you need to pay within 28 days so these types of bridging loans have to be very quick.
There’s no hiding that a bridging loan does cost a lot more than mortgage borrowing, because it’s so fast – it means there’s a lot more risk. It’s all about weighing up your options and working out the profit you can potentially make.
What does first charge and second charge mean on a bridging loan?
When you buy a property, a house, a bar, a commercial building etc., you have a ‘charge’ on it. So on the Land Register, you’ve got your name against the property.
If you were getting a bridging loan, the lender would put a charge against the property – which means that they won’t allow you to sell it or move it into another person’s or company until that charge has been paid off.
The First Charge sets out who gets paid first if the property is repossessed for some reason. The Second Charge is where the First Charge lender has been paid off, any remaining funds go to this second lender. So putting a charge on a property means that the lender will get their money back if things go wrong.
What is an exit strategy?
Your lender and your broker will talk to you very early on about your repayment plan. How are you going to give the money back at the end of the bridging loan?
A common approach is to sell the property once all the refurbishment is done. Another exit strategy is a refinance option. So, you replace your bridge, which is a more expensive type of borrowing, with a normal mortgage. Many people move to a Buy to Let mortgage and rent the property out.
Some people repay a bridging loan via the sale of another asset – you might have another property in the background that you’re selling.
It doesn’t matter what the strategy is, but the lender will want the details. At the end of the term, whether it’s a six-month option or a twelve-month option, a closed bridge will have an end date. While most bridging providers will extend your loan, it will be very costly to do that.
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What if I have bad credit? Can I still get a bridging loan?
It all depends on the circumstances. If you’ve had a blemish on your credit file or something that can be explained, there’s usually no big problem.
But if somebody hasn’t owned a house before or it was a long time ago, and they have a very damaged credit history, it will be hard to convince a lender to grant a loan.
But lenders can also be understanding. If you have had a life changing event such as a divorce or a bereavement, lenders may look more closely at your credit before the event to understand your potential as a borrower.
The best approach is to speak to a broker and explain your circumstances.
What are the alternatives to a bridging loan?
This is a unique type of financial product that’s there for a specific purpose. The other alternative is to potentially go into a joint venture with somebody that you trust – if you have wealthy family members or parents that can lend to you, for example.
But ultimately not everybody has access to this kind of support, which is why bridging loans can be so important.
Other options might be to extend your exchange date to give you more time to raise the money. You might be able to arrange a Buy to Let mortgage rather than a bridging loan. It’s all down to negotiation and good financial advice.
What costs are involved with a bridging loan?
Bridging is a very expensive form of lending, especially as the interest is usually rolled up.
You don’t pay a monthly payment on a bridge – although you can request this with some providers.
The other fees that are associated include valuation fees, legal fees and a survey on the property. Other fees to consider are broker fees, especially if you’re paying the broker upfront for their work. These charges should all be clearly disclosed to you before you sign anything.
Remember that this is an unregulated space. Make sure you completely understand the details of the loan as well as the costs and fees. An experienced broker will find you a good deal and be transparent – and usually will present a few options. Beware brokers that offer a single deal for you to take or leave.
How do I apply for a bridging loan?
You can go to a commercial broker, but do ask about their experience with bridging loans and how many lenders they can compare to find the best deals. It’s always better to go with a broker rather than going directly to a funder or a bank.
In terms of applying, you would obviously start by finding the property you’re going to buy and the reserve price. The broker will ask you a series of questions about your plans, your financial situation and exit strategy.
They should be able to give you a good idea whether the numbers add up and the level of profit you can expect. A broker will also tell you if your scheme is not going to work the way you think, or won’t reach your expected profit. From that point on, if everything looks healthy, your broker will find you a deal and support you through the application process.
We’re here to help at every stage, so just get in touch to explore your options.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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