You have clicked into this video because you might be looking at getting a bridging loan. So you might have heard that people telling you to stay clear of bridging loan and that it is quite expensive. In this post, we are going to share with you our first-hand experience and also 4 things to watch out for when you are applying for bridging loan.
If you prefer a video version, here's where we sat down and talk through it:
We're not financial advisors, and we are sharing our own experience from a customer point of view.
We have used bridging finance a number of times to fund 9 projects, ranging from baby buy-to-lets to flip, to also house conversions to HMOs. And now we have either refinanced them or sold them on.
1. EXPECT DELAYS
Point number one is expect delays. Bridging is supposed to be a quick form of financing your property deals but that doesn't mean that they are asking for every imaginable documentation right at the beginning of your application. We have experienced throughout the whole application, they keep coming back to you and ask for more documentation. And you're just thinking, wait a moment. They could have asked me that right at the beginning of the application, but that's not really how it works and we've experienced that. They're asking for something right at the latest end of your application, for information they could have asked at the beginning of your application.
So that's why a big tip here you have to be really proactive and respond really quickly when you get emails from them. And we normally do it, we normally chase them up once every week or once in five days or three days. Sometimes depending on the deal, You just want to keep the ball rolling and you don't want to cause any unnecessary delays.
2. PLAN FOR LONGER THAN YOU NEED
Point number two is, always plan for longer than you need. Bridging loans are designed for short term finance, so you can go onto cheaper lending at the back end or you might sell it. However, keep in mind that what you do with the property afterwards might affect how long you will stay on the bridge. Reason being is, you are going to sell it to a first-time buyer, for example, and they need to get their ducks in a row. They have to apply for a mortgage. And that's where you might tap into what is called the 6 months rule that a lot of banks are following. You sit there waiting for them to get all their finances sorted out, and you have to pay your bridge in the meantime.
For example, we did a flip that was finished renovation within six to eight weeks and we could find a first-time buyer who wants to buy it. They also happen to have a decision in principle from their bank. They're all set up but the only caveat is the bank wanted us to be in ownership of the property for at least six months. That was the only drawback that we have to wait for the clock to hit six months before the first time buyer can actually get a mortgage on our property.
This meant we had to pay for the bridging loan for six months. Then they would process the application for the first time buyer, which meant another couple of weeks until that went through. We paid for seven months of bridging, although our refurbishment was done after six or eight weeks. The 6 months rule is actually not a rule, it's a guideline but it means banks are not supposed to lend within the first six months of ownership of a property to someone else who is buying with a mortgage. If you're selling to someone that is buying the property with cash, that doesn't apply because there's no bank involved. And there are banks that do lend within the first six months of ownership, but they are just few and far in between.
The tip here is always make sure that you have calculated your project runway for 8 to 12 months, because delays always happen.
3. HAVE A SOLID EXIT
Point number three is, make sure you have a solid exit strategy in place. Your usual exit strategies are refinancing or sell. When it comes to refinancing, there are bridging lenders out there that are actually looking at your mortgage-ability when it comes to refinancing in your personal loan, for example. For our first bridge, we got refused by one bridging lender because we were only eligible for one single lender. They took that into their lending decision and we were refused the bridge because of that. We had to pivot to another bridging lender who was fine with us having only one single lender to refinance. Because we could demonstrate that there is a solid second exit in place which is selling the property on the open market. When it comes to selling, you need to be thinking, can your potential buyer obtain a mortgage on that property? There are some properties that are of non-traditional construction and you will have a hard time finding lending for it. If you find it hard to get lending, what does it look like for your potential buyer? Always make sure that you know, what happens at the end of the project in order to get off the bridge.
Make sure you always speak to your mortgage broker before you apply for a bridging loan.
4. UNDERSTAND ALL THE COSTS INVOLVED
The very last point, which is what are the all the costs involved in arranging a bridging finance? I'm sure everyone of you are really curious to know about this. I would say there are five main costs involved in arranging for bridging finance. The first one is the bridging interest rate. The second one is the arrangement and the exit fees. These can be quite expensive. Make sure you find it out from your broker. The third one is valuation fee. A lender can send out their independent surveyor, to survey a property and come up with a valuation, or they can also do a desktop valuation and you always have to pay for it. The fourth one is, broker fee. So if you're going through a broker to arrange for a bridging you obviously have to pay the broker, a broker fee. But there are some scenarios where you can go to a bridging lender directly and that's where you can skip paying the broker fee. The final cost is legal fees. Obviously solicitors are involved in the paperwork because they are going to give security to the bridging lenders. Finally look at your loan to value. Usually you're around the 75% mark of the purchase price of a property. That's what lenders willing to pay for. When you're buying a property, with a really low purchase price, that's when lending gets a bit tricky.
We found personally that once your loan amount goes below the £40,000 mark, then interest rates are shooting up. And the absolute minimum that bridging lenders are usually looking for to lend, is at £25,000, but that's when you're really looking for the most expensive rates that are out there on the market. A top tip from us is ask for an example illustration from the bridging lender, or from your broker, so you understand all the costs involved. Because this way you're not surprised by the cost of that bridging loan and you can progress swiftly with actually buying the property. Having said that, we've actually made a bridging calculator excel sheet that we have used over the past few years on every deal that we have done, that way we understood in detail, how much will that loan cost us. And if you're an analyst like me, you will like this tool. Again, we are not financial advisors and all information from this post are based on our very own experience using bridging loans. If you need help in finding a broker, you can get in touch with us here: http://calendly.com/em-investments/30min
ELSIE AND MARKUS