As one of Kent’s leading Independent Mortgage Brokers specialising in loans for property investment, we are often asked questions about Bridging finance, so we thought that it was time to put together some answers to those most frequently asked.
Why has my Bridging loan been rejected due to “down valuation”, we are buying at market value?
Another very good question that often raises its ugly head!
What do we mean?
Lending is all about risk……… actually risk and reward to be more precise. Bridging lenders all have different ways to structure lending around their risk models
However, by the same token, they are in a competitive market and have to do something to attract business, so most use service, sporty criteria, cheap “headline” interest rates or a combination of thereof.
So you may see a lender advertising 0.66% per month up to 70% loan to value (LTV), which on the face of it may look a little better than others that lend at similar LTVs. However, and this is the salient point, whose value?
Some Bridging lenders instruct their surveyors to value using a “90 day sale” value. The surveyors will then base the valuation of the property on the sale price that could be achieved if it had to be sold within 90 days. This is a forced sale value in effect and is often lower than an “open market value”. An open market value is the value that could be achieved if the property was sold in the normal way.
Lenders that instruct on a 90 day value basis are taking less risk and might reflect this in the interest rate they offer. This is where the trouble often starts for those who get caught out by this issue, because the valuation affects the size of bridging loan the lender is willing to provide………….the difference between the 90 day value and the open market value can easily be enough to put a profitable deal on the rocks.
Our Top Tip: Make sure that you talk to an Independent Mortgage Broker with experience in dealing with Bridging Finance lenders’ valuation methods. Discuss your deal and the impact that the different valuation methods may have on it.
What is the difference between development finance and a bridging loan?
There are a good number of similarities shared between Bridging and Development finance. They are both a short term way to borrow money, which requires an exit strategy; sale or refinance.
However Bridging finance has more uses than just refurbishment or development work. In addition it can be used to:
- purchase of a property, whilst awaiting funds from sale of another
- fund the short term cash flow needs of a business or individual
- purchase complex security prior to splitting title etc
- provide funds for a lease extension, unavailable through standard mortgage lenders
- any legal purpose!
Development Finance provides funds for that purpose only, the purchase or refinance of some sort of development project, either new build, conversion or renovation. Whereas bridging finance is more generally available over a maximum term of 12 months (there are exceptions), Development Finance is available up to 3 years on larger projects. The real differentiator here is that Development Finance providers put great importance on previous demonstrable experience and this means that for those that qualify, the interest rates are lower than those available on a Bridging Finance deal.
Good news on a long term project!
Is it possible to guarantee a Buy to Let Mortgage as an exit from a refurbishment Bridging Loan?
Another good question and out of all those we are asked this is up at the top on the scale of importance.
The answer is in a word……………..No!
It’s essential for any client who takes out a bridging loan to have sale as an exit option….just in case. Never get backed into a corner on the term of a bridging loan, as penalty interest combined with a distressed sale value could wipe out any profit……or worse.
The reason that there are no guarantees is due to the way the Bridging market is funded. It’s generally investor driven, and these investor backers want a quick return on their money. They are not in it for the long haul. Long term buy to let mortgages don’t fit the lending model of most bridging finance companies; there are exceptions which we will cover off below.
In most cases clients who want to retain a property that has been “bridged” are left to find a suitable BTL mortgage and this is where the trouble can start. The majority of BTL mortgage lenders will not offer a long term loan as an exit from bridging finance, so care is needed beforehand to ensure that clients, the property and the loan purpose are acceptable to the few lenders willing to issue a loan.
Now there are a couple of lenders that offer bridging and buy to let loans. Their product is often called a “bridge to term”, which implies the certainty of a seamless transition from one to the other.
Don’t be fooled here.
The “product” is not a whole, rather two separate applications and as such is similar to finding a buy to let mortgage exit with another company.
So just as with an application to a lender other than the Bridging lender, everything will have to fit, including your status, the property, rental cover calculation and recommendation of the security from the valuer. Only part of this can be agreed upfront and until the refurbishment is complete and the valuer instructed on BTL mortgage application carries out his inspection, there is no absolute guarantee of a Buy to Let Mortgage loan offer.
TOP TIP: Talk to an Independent Mortgage Broker that has experience in dealing with Bridging Finance and Buy to Let Mortgages, as early as possible. As always be realistic on how long it might take to sell your refurbishment should there be a problem.
Are there any buy to let lenders in the market that will offer loans to “portfolio landlords”?
This question has been asked many and we mean many times before!!
It can be interpreted in a couple of ways.
If you mean is there a standard buy to let mortgage lender that will issue one mortgage, but take multiple security properties…………then no. This exists to a small degree in the commercial lending world, however underwriting and terms don’t really fit the buy to let mortgage borrower’s needs or expectations.
If you are a landlord with a portfolio of more than 10 properties (sometimes less) and are finding it hard to source a buy to let mortgage……..then you are not alone.
Unfortunately many of the “ pile it high, sell it cheap” rate driven buy to let lenders positively encourage the amateur, by limiting not only the number of potential buy to let mortgage loans it will issue itself; many now have an overall portfolio limit that takes into consideration buy to let loans with other lenders! One lender has a portfolio limit of 5 properties in total and will not lend even if the 5 buy to let properties have no loans secured against them!!
There is good news, however, and that comes in the form of the specialist lenders in the investment property market, led by so called “Challenger Banks”. These guys are positively issuing loans to experienced property landlords, some have a criteria minimum of three properties and two years’ experience.
What’s more they take tend to take “sporty” security and occupancy types, such as HMOs, Multi Unit freeholds, Student and Holiday Lets.
Top Tip: Most of the specialist lenders do not offer their buy to let loans direct to the public, so find yourself a good Independent Mortgage Broker that enjoys dealing in buy to let mortgage business.
What happens if I go over the originally agreed term of the loan?
This is not a good situation to put yourself in. It will always be better to ask for longer at outset and pay it back early. The lender is not obliged to grant you an extension. The contract will have finished at the end of the original term and a new loan agreement will need to be issued.
There are two important consequences
- The lender may be very unhappy and not willing to extend the loan. He may put you on a penalty interest rate and charge you an extra set of fees. Penalty interest rates may be twice what you were paying!!
- Even if the lender agrees the extension you are likely to have to pay another set of fees
Are there other costs?
Yes. As with other property loans there are survey costs and legal costs.
If you are doing a development project and need to draw down the loan in stages, then you will have to pay for re-inspection surveys. Most lenders require the borrower to have independent legal representation, however we know of a couple that allow dual representation, which can keep the cost down.
What are the fees that are involved with bridging finance?
Beware the fees!
Most lenders charge some sort of arrangement fee and some will charge an exit fee. This exit fee is specifically not a penalty for early redemption but is simply just another cost to you as part of the deal. Our advice here is to always talk to an Independent Mortgage Broker who knows the Bridging Finance market, particularly when it comes to finding a product with no exit fee.
Look at the overall level of fees because the lenders have to make their money somewhere.
It is not unusual to see fees at 2% and 1% at exit (unless you can avoid them !!)
In the case of a development bridging loan, some lenders charge an exit fee based not on the gross loan amount, but as a percentage of the gross developed value. This situation is rather unpalatable to most developers.
Are bridging loans expensive?
The interest cost is typically 0.65-2% per month.
The cost is influenced by loan to value, type of security, status, purpose and whether it’s first or second charge lending. So, at 0.75%pcm, a 3 month bridging loan could cost total interest 2.25%. This may seem a lot, which it is in comparison to normal lending on property, but if bridging is the only way open to buying the property, then this short term cost needs to be considered against a longer term gain.
Can a Limited company take out a bridging finance loan?
Sure, in fact we have recently received more enquiries than ever for limited company buy to let refurbishment bridging. The reason is connected to HMRC changes in the taxation of property investment held by individuals, LLPs and Trusts which will start to come in to force in 2017, phased in over four years. These changes have a worsening effect on the tax position for those affected, in terms of being able to offset mortgage interest costs against rent. Limited Companies are not affected by the new rules.
Transferring ownership from a private individual to a limited company, even if you own the latter, can incur Capital Gains Tax and Stamp Duty Land Tax. Thus owning the property at outset in the limited company and taking out a loan out in the company name makes a lot of sense.
How long could we take out a Bridging Loan for?
The answer is one day to twenty four months. However, twenty four months is a long time so is it a bridging loan or more normal finance you should be looking at? Our experience is that a 3-12 months term would be an average, otherwise the cost tends to be prohibitive.