How about we weigh up the short-term property financing to find out the pros and cons of such options as bridging loans and similar ones?
Bridging has very much taken off and has become extremely attractive lately, mainly if you are in need of money very quickly, no matter which it is – finishing a deal at the auction, doing a quick flip for a profit, or being stuck in a chain and just wanting to get into your new home without everything collapsing.
So, what is it exactly? To put it simply, it is the loan you decide to take for a short period of time (from a few months to two years at most) – a temporary solution only. Typically, the bridging loan is used to “bridge” the period when you have to have money immediately and later you will sort out something for a longer period (e.g., selling your old home or getting a standard mortgage for the new property). The nice thing is that a bridging broker usually pays more attention to the selling price of the property rather than to your payslips and income, so they can be set up very quickly as they are sure there is a feasible way out to get their money back.
Let’s dive into the advantages
1. Lightning fast – The time here is counted in days and not months. This is a real rescue if you are at an auction and the time for the final bid is very close or if you have found a great deal that will not be available for long. The same would apply if your chain had collapsed and you were going to lose the house that you love – bridging could still keep everything going.
Quick tip: Make sure all your papers (ID, bank statements, and details of the property) are ready – it will simplify the lender’s work, and you can get your money sooner.
2. Lenders are much more relaxed about the borrowers. Traditional banks require two years of good accounts and a heap of paperwork to examine. Bridging lenders primarily worry about only one thing: “Can we get our money back if we have to sell this property?” So, if you are self-employed, the house needs some work, or it is currently unmortgageable, you still have a good chance of getting the money.
Tip: Have a perfectly clear exit plan when you start – “I am selling in six months” or “I am getting a buy-to-let mortgage”. Lenders are certainty lovers of this.
3. Exactly right as a source of finance for refurb-and-flip projects – Purchase a deteriorated property, make it look good again by putting some new windows and a nice kitchen, and then sell it for a higher price (or refinance and keep it). Bridging fits perfectly in this scenario. Some lenders even promote “refurb bridging” whereby they release the money in different stages as the work progresses.
Tip: Take a look at a few different refurb products – they usually go higher with LTVs and can be cheaper consequently.
4. Fantastic if you are breaking a chain and going to move. Your buyer is pulling out at the last minute? Rather than losing the new place, bridge it, move in, and then sell your old one when the market is less volatile.
Tip: Get your current home appraised as soon as possible so you will know exactly how much you can borrow against it.
We have also to acknowledge the negative.
1. They are expensive. Usually, the interest rates are higher than a normal mortgage, and the interest is charged monthly (sometimes rolled-up, sometimes pay-as-you-go). If things take longer than you expected, this may cause you a lot of trouble later.
Tip: Before you sign anything, figure out the total cost – interest, arrangement fee, valuation, legals, exit fee, the whole lot. It is also quite helpful to anticipate your bridging needs by using a bridging loan calculator.
2. Fees, fees, and even more fees! The arrangement fees can be from 1 to 2%, plus the valuation fee, legal costs, and sometimes an exit fee. What might seem as insignificant may turn into a sizable amount, so be sure you take this into account when getting a loan.
Tip: Always request the full breakdown in writing, and look at a few different options before deciding. The one with the lowest headline rate is not necessarily the cheapest once the fees are taken into consideration.
3. You are completely dependent on your exit plan working. For instance, if the market crashes, your refinance falls through, or the council delays your planning permission for months, then you will have nowhere to go. It can become quite costly if you decide to extend the loan or pay it off early.
Tip: Besides having a Plan A, you should also come up with a Plan B. Always think on the bright side, but still, be prepared for the worst.
4. The market can turn against you! Property prices drop, interest rates skyrocket, builders take longer than expected – any and every thing that could go wrong, often does thus, leaving you to make an expensive repayment for a longer period than you had anticipated.
Tip: Make sure you have a good contingency in your budget (at least 10–15%) and do not assume that everything will go smoothly.
Who benefits the most?
• Investors who are buying auction bargains or off-market deals
• Developers doing refurbs or conversions
• Regular homebuyers who are chain nightmares and just want to move
• Landlords who need to quickly take some cash out of one property to buy another
Provided you do it with your eyes wide open, a solid plan and a proper exit (or two), bridging will work wonders. House moves that looked dead in the water, people making serious money and saving the day.
Last but not least, short-term finance is neither cheap nor risk-free, but still, it can be the difference between grabbing a great opportunity and watching it disappear when you need to move quickly or everyone else is saying no. Just don’t wing it – plan efficiently, budget for the worst, and you’ll be okay.