MarvelSuccess

Bridging Finance 101 Continuation…

How much do you want to borrow?  Most specialist property lenders will offer funding from £25,000 to £25,000,000 (and beyond when it comes to development bridging). 

How much is your property worth?  The value of your property will affect how much you can borrow and the rates you will be charged. Most bridging lenders will loan up to 75% of the value of a property, known as the ‘loan-to-value’ or LTV. The higher the LTV, the higher the interest rate applied. Some lenders can offer more, but it’s unusual unless the loan is financing property development finance. While typically based on the lower of the purchase price vs the open market value, some bridging lenders will loan against the gross development value (GDV), i.e., the value of the property after renovation has taken place.

How long do you need to borrow for?  Most bridging lenders will charge a minimum interest period of 3 months, although the loans themselves can last for as little as a few weeks or up to as long as up to 18 months, which is the maximum lending term in most cases. You can choose to exit the loan early, and normally, as long as you have paid the minimum interest due, then you will be refunded any excess interest you may have paid. Bear in mind, though, some lenders do charge exit fees, though and so you will need to take that into consideration before making your decision.

Do you already have an existing charge on the property?  This a pre-existing charge on your property will depend on affect how much you can borrow as a bridging loan. If, for example, you already have a long-term mortgage in place, then you may be able to borrow using a second charge, only if there is enough equity available in the property. These charges determine the order in which creditors are paid, were the property to be seized. A first charge has priority over a second charge, hence second charges are more expensive. A first charge lender will also need to provide permission for a second charge.

What is your exit strategy to pay off the loan? There are only two options here and the bridging lender will want to see that you have a clear strategy in mind, whether it’s to sell on the property on, e.g., having bought at a discount and improved the value through refurbishment, or whether the plan is to refinance the property onto a long-term mortgage. As most term mortgages will not allow improvement works, it is common for a bridging loan to be used to acquire a property and renovate it, before moving to a term mortgage.

Bridging loans are expensive relative to a mortgage. You can expect to pay anywhere from 0.4% to 1.5% per month, depending on a variety of factors, including: the size of the loan, loan-to-value percentage (LTV), duration, experience of the borrower and credit rating of the borrower. While not directly affecting the lending rate, there are lenders that can disburse the money very quickly, and these this also tends to be make it more expensive. 

As with most forms of finance, the interest rates can be fixed or variable.  – although typically they rates are fixed, meaning each monthly payment will remain the same. With a variable rate, the interest rate can change, meaning your monthly payments could increase or decrease.

Interest Charges  There are three types of interest charges, depending on the lender and the borrower’s circumstances and sometimes they may be offered as a combination, these are:

Retained Interest  The interest is deducted from the gross loan at the beginning of the term and retained by the lender. Therefore, the borrower does not need to make any monthly repayments and the principal capital sum is repaid at term.

Rolled Up Interest The interest is added onto the loan and paid at the end of the loan term, meaning that, again, there are no monthly payments – both the capital and interest are paid at term. This usually means the borrower will receive more money upfront. 

Serviced Interest As with term mortgages, with serviced interest, the is interest is which is paid off on a monthly basis, with the loan capital repaid at term. This Serviced interest is rarely used with bridging finance, however, it does have a benefit for foreign nationals. Most term mortgages need evidence of existing mortgage conduct; if there is no credit history, a serviced bridging loan, taken out for at least 6 months, can help to build that credit history to make it possible to apply for a buy-to-let (BTL) mortgage.

Other Costs
On top of interest fees, there are also a number of other costs that you need to be aware of, including:

Arrangement Fee: A fee charged by the lender for providing the loan, typically around 2% of the value of the loan.

Exit Fees: A fee charged by the lender if you repay the loan early. Most lenders charge a minimum of 3 months interest, and with no further additional early repayment charges, although some lenders will add an exit fee of 0.5-1% onto the loan, especially if the value of the loan is small.

Administration Fee: A fee to cover the paperwork and other disbursement costs of the lender.

Legal Fees: You are expected to cover both your own and the lender’s legal fees. These tend to be a set figure based on the value of the property, and you can expect to pay upwards of £1,200 plus VAT.

Valuation Fees: Another fixed fee, paid to the valuer chosen by the lender. Again, this fee is determined by property value, starting from £400 plus VAT. If you want to get a valuation done privately, ahead of taking out a loan, check with your broker if a re-type is would be allowed, i.e. will the existing valuation you procure be acceptable and usable by the lender. This may be possible, if the valuer is on the lender’s approved panel.

Broker Fees: These fees can vary from one broker to another. Some brokers charge fixed fees up front of, say, £999 and then add 1-3% of the value of the loan on top. Finance are a lot more transparent. We charge a fixed fee of £499 after you have received quotes and decided which lender to proceed with, followed by a fee of 0.5% of the value of the gross loan upon receiving your full mortgage offer. These are fixed, no matter the size of the loan, or the complexity of the transaction. We may also be paid a procuration fee by the lender.

Getting a bridging loan is quick, having gathered the initial information regarding your personal circumstances and the property itself. Finanze will contact as many relevant lenders as possible out of its database of over 150, to secure a wide range of quotes for you. These will then be analysed to determine which quote provides the best terms to match your needs, e.g. to have most funds on day 1 or least overall cost of debt (blended rate) or lowest interest rate etc. 

The quotes generally take around 24 hours to collate, after which you will be in a position to decide which one is best. Following the formal application, which will require the collection of a number of documents, an offer will be provided subject to valuation and legal compliance. Assuming everything moves smoothly, the funds can be released in as little as a week, but more often, within 4 weeks.

In terms of the documentation required to get a loan, it’s quite straightforward. There is normally an extensive comprehensive fact–find looking at your personal status, salary, credit history, property portfolio and experience. They will collect certified true copies of your ID and proof of address. Documents will be required, if applicable, to confirm your company structure for the property investment, source of funds for any deposits and confirmation of your managing agent in the UK etc. They will also want to see certified copies of 6 months’ of personal and business bank statements along with personal statements, that tie up with any income you received. 

If your company has more than 1 Director or Shareholder, you will need to provide this information detailed above for all company officers. It’s generally not recommended not to have more than 4 four directors or shareholders in your company structure. If you are applying as an individual, then the list of required documentation is shorter, however, it’s worth discussing this with a tax advisor as to decide whether owning the a property through a LTD limited company may be better for you as there are tax advantages of using a company structure, but it’s best to talk to an expert.

How does bridging finance compare with a Buy -to-Let (BTL) mortgage?

A BTL mortgage is a long-term product, from 2 years up to 30 years, typically, although many investment mortgages are only for 10 years. The interest rates here in the UK are much cheaper overall, but as a foreign national you will still be expected to pay upwards of 4% per year, so this rate is still over two–thirds cheaper than taking out a bridging loan. But, bear in mind that mortgages are only available for property that does not need any work doing to it – i.e. turnkey properties ready to rent out immediately. You also cannot live in the property yourself or allow relatives to live there; it has to be rented out as an Assured Shorthold Tenancy (AST) agreement to a rent-paying tenant paying rent. 

In terms of documentation for a BTL mortgage, lenders will also require copies of ASTs for tenants along with the documents previously mentioned, and, if you have work done to the property, they may want to see a schedule of works. 

How does bridging finance compare with a term mortgage?

The process of getting a term mortgage is a lot more complicated than bridging finance. It can take upwards of 3 months to process and for the money to be disbursed, unlike bridging finance that can only take a matter of weeks. There are also only a very limited number of lenders who will provide long term mortgages for foreign nationals unless there is pre-existing mortgage conduct (e.g. from having serviced a bridging loan first).

When it comes to term mortgages, you are generally offered 3 types of products: 2-year fixed, 5– year fixed or variable rate. The 2- and 5-year fixed products, means the interest rate charged on the loan is fixed for those years before moving onto a floating rate, charged at the bank rate + the LIBOR or Bank of England base rate which is currently 0.1%. If you think interest rates are going to increase in the short to mid term, opt for a longer fixed period while the rate is low and vice versa if you think the rates are likely to go down. If you think you will be able to pay off the mortgage early, opt for a variable rate, as the fixed terms carry early repayment charge penalties, typically up to 3% of the value of the loan!

No matter your needs, Finanze is here to help you every step of the way. To discuss your circumstances in more detail, get in touch with us on marvel@finanze.co.uk or visit www.finanze.co.uk.