One of the great things about being in property today is that there are so many different ways we can raise our finance. And if you find yourself in a situation where you find yourself a fantastic refurb opportunity, but you can’t get standard buy to let lending because it needs a bit too much work to do, one way around that is to think about bridging.
This is quite an advanced strategy because you need to know exactly what you are doing. Bridging can be very expensive, for example I am lining up a purchase now which I hope will complete over the next couple of weeks and I am using bridging to finance it, and there are quite hefty fees payable to the lender to set it up.
Why am I using bridging? It is a low value property, it needs quite a lot of work doing to it and I don’t think there are very many buy to let lenders who would be interested in funding me, so bridging is the obvious way to get around this.
Could I do it with my own cash? If I’ve got my own cash of course I could. But one of the reasons why I might not want to use my own cash is because I want to keep my cash free to do other deals with and it helps protect my cash-flow, in that sense. So, I’m going to use bridging and bridging can be expensive.
In this particular instance the fees to pay come to around £2,000 on what is effectively a £50,000 loan. Also, I will be paying 1.5% a month in interest. Contrast that with 2.25% per year for a typical buy to let loan.
It’s worth it for me because I know that I can buy this property cheap and that I can do a refurb through which I can add a lot of value. Then in 6 months time I am planning to go to a conventional buy to let lender who will grant me a buy to let mortgage so I am able to switch out of the bridging loan.
Therefore, I am not going to be stuck in this bridging loan forever which is a good thing because typically bridging is for short term loans. Some bridging lenders will go to 3 months, some will go to 6 months, some to 12 months and some will run on. But you will pay high fees for that.
The problem is, for example, if you have a 6 month bridge and you go past the 6 months many bridging lenders will charge you penalty fees and it can become very expensive. If you are paying 1.5% a month, it might go to 2.5% or more as a penalty if you miss repayment at the end of the loan period.
I’ve got a very clear plan and I am working with my broker to ensure that when the time comes, I can go off the bridging and I can go on to a conventional buy to let loan.
But in the short term using a more expensive bridging option allows me access to a deal which many buy to let lenders wouldn’t touch. In other words, it’s allowing me to do a deal which I wouldn’t otherwise be able to do.
Peter Jones B.Sc FRICS
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