Guide To Bridging Loans

Bridging loans are not a magical solution to buying properties and building a portfolio without having any money, however it is a very useful tool.

What is a Bridging Loan?

A bridging loan is an alternative to a mortgage for investors. It allows you to quickly borrow 70% -80% of a property very quickly, effectively as a cash buyer, but unlike a mortgage it may only be a short period of 6 – 12 months, where you will then have to pay back the full amount.

What is a bridging loan used for?

This can depend on what you are using it for. The main market for these loans is the buy-to-let market. Essentially it is broken down into 2 categories regulated and non-regulated bridging loans

Regulated bridging loans – Typically these are not for commercial borrowers or buy-to-let investors. They are more likely someone wanting to do some form of home improvement on their own property or even build their own home. In this case a lot of scrutiny is carried out and it is essentially approved by the FCA.

Non-regulated loan – These are mostly commercial loans meant primarily for investment purposes. The main use for this is a typical buy refurb refinance property investment. These can be far more easily obtained,  so does open the possibility of more risk and less transparent lenders.

Pros and Cons of a Bridging loan

 

Pros

• Speed and accessibility - Quick way of funding an investment.

 

• Flexibility on terms such as deposit and repayment terms. Typically, you don’t have to pay back a penny until the agreed term has ended. This makes it ideal for a refurbishment job where you ideally don’t want to start paying back anything until the job is complete

 

• Cash Buyer - Allows you to buy as a cash buyer in the eyes of a seller, giving you more negotiation power when buying. This allows you to put in a lower offer and grab a good deal from a distressed seller.

Cons

• High interest rates – Bridging loans unlike mortgages at 3% – 5% will be more like 10% interest.

 

• Property Collateral – If you can’t pay the money back then the lender can charge on the property meaning they can essentially take the property as collateral.

 

• Fees and penalties – If you go over your agreed term with payments then as these are non-regulated the lender can charge you with all kinds of additional costs. This could easily push you out of Profit.

 

How to minimise risks associated with Bridging loans

The main way to reduce any risks you can have with a bridging loan is to fully educate yourself on the investment strategy. At Fabrik we have plenty of essential guides based on our own experience of investing in dozens of properties, which you can read below…

 

How to invest in property with less than £150K - £250K

How to appraise a property development

What is refinancing and how does it work

Refinancing vs Selling as a Property investor as an investor

How to release equity and raise funds to build your portfolio

 

Outside of being well educated you can then stick to a handful of rules and procedures…

 

• Research bridging lenders. Some lenders may know very little about property investments. Ideally you will want a lender that is educated in property as they may be able to lend you some free advice along the way. They will also know the feasibility of a property investment better, therefore their figures and rates will be more accurate with the feasibility of the investment. You also want to check their reputation online through reviews, and even check them out on Companies House and all connected directors. Just make sure they are fully reputable.

 

• Extend the term period – If you think a property is going to take 6 months to complete, then try and get good terms on a 12 month basis. This gives you an extra 6 months for unforeseen circumstances.

 

• Know the fees and penalties – Make sure you know all the terms and conditions of the loan inside and out. If you know the possible penalties you may have to pay in the event your investment doesn’t go fully to plan (exit strategy) then you can plan for these costs, or at the very least know your risks.

 

Bridging Loan Exit Strategy

Arguably the key to getting a bridging loan investment right is the exit strategy. There are essentially 2 ways to exit this for a refurb model, and that is refinance or sell.

Refinance - The most popular strategy is to refinance the property with the bank. Once you have added value to the property you can approach a mortgage provider and ask them to refinance your property. If the property is worth more than what you paid for it in addition to what you have spent on refurbing it, then this is extra capital that you can pull out of a mortgage loan.

 So, if you spend £80k on a property, spend £20k on refurbing int and then a mortgage provider is happy to refinance the property at £140k then you have pulled out £40k (minus your initial deposit for the profit). This money can then be spent on a deposit for another investment property using the same technique.

We go into more detail on how to refinance, looking at the capital and mathematics of how it all works which you can read here… How to invest 150k in property (refurb refinance)

As the linked article explains for this to work you must get all the financials correct. But, if done correctly then you can essentially do it repeatedly, buying dozens of properties, all off the back of an initial deposit enough for only one property.

It is also then worth knowing that a mortgage broker typically will not refinance your property until 6 months after you have purchased it. However, it is possible to find mortgage lenders who will give you a mortgage less than 6 months, but as a rule of thumbs they will have higher fees.  We would recommend that you go with 6-months, as a refurb will typically take this long anyway.

Finally, with refinance you retain the property and therefore its rental return and any future capital gains.

 

Sell – At Fabrik we haven’t typically sold loads of our own properties and choose to go with the refinance model as this is how many professional full-time investors run their investment companies. However, maybe the project didn’t go fully to plan, and you are only just scraping a profit, and it is not enough to put into a new property as a deposit. Or maybe you are happy with the quick profit and have no intention of going through this process again. At this point you can simply put it back on the market for a profit.

With a recession looming it may make sense to sell properties to avoid the imminent rise in interest rates on mortgages.