Bridging loans can be a bit of an alien concept for most property investors, but it you’re serious about building your portolio then you should at least know how they work. In recent months we’ve seen a much greater demand for these short-term loans due to market changes, so let’s look at why bridging finance is an increasingly popular solution.
Mainstream mortgages
Your typical bank likes a client application that fits the mould and is pretty straight-forward. Decent credit score, decent asset, reliable income streams and minimal quirks. This normally looks like a mortgage where you can demonstrate that you can consistently generate enough income to make loan repayments. Loans will take 2-3 months to put in place.
The problem with conventional mortgages
The problem comes when your application falls outside of the bank’s sweet spot. If any of the below scenarios apply then it can mean that the bank may not be happy supporting with a conventional buy to let mortgage or commercial mortgage:
- Unproven income (either trading income or rental income)
- Asset is dilapidated and requires work
- Leases are too short
- Borrower has poor credit history
- Completion is required within 4 weeks
Bridging loans as a solution
Bridging loans can become a valid solution for you when any of the above apply. They are short term loans that serve the purpose of completing on a property when conventional finance is unavailable. A bridging loan can enable you to snap up a great deal in a short space of time, with typical bridging loans taking less than 4 weeks to complete. The loan also gives you time to:
- Refurbish the asset
- Bring in a tenant
- Prove sustainability of income
Once this is done you should be able to refinance the loan with a conventional mortgage, or sell the property for a profit.
The cost of bridging finance
While bridging loans are more expensive than convention mortgages, pricing tends not to be prohibitive if the loan is used correctly. Arrangement fees are normally 2%, and interest rates tend to be 6%-12% per annum (lower end for simpler residential bridging; higher end for complex commercial cases). So if you refinance or sell within 6 months then you’ll only pay 3%-6% interest for the pleasure.
