What is Bridging Finance? A Guide for Property Investors
Bridging finance is a tool that property investors can use to grow their portfolios faster but, being more expensive than other types of finance, it should only be used in certain scenarios. Today, Rory O’Mara talks through a few example situations where bridging finance would normally be used to the best effect.
What is Bridging Finance?
Amy: Can you tell us, Rory, for anyone who’s watching who isn’t aware of what bridging finance is, can you give us an overview of what is bridging finance and how it might be used, in property?
Rory: So, probably the first question… If I say, ‘bridging finance’, most people will have a sucking of teeth and they’ll be like, ‘Oh it’s expensive’.
So, that’s the first thought.
Bridging finance really is a tool that you use for the right type of project.
So, let’s look at some scenarios.
Bridging Finance (Scenarios)
Rory: If a property is not mortgageable, so, there isn’t a kitchen or a bathroom, then you can’t get a regular mortgage. So, the alternative would be bridging finance or cash or a combination of the two and that’s one, really good example.
The other one might be to give you a competitive edge. So, you’re chasing another buyer for a property. If you’ve got cash then you should be able to complete much more timely than someone who’s getting a mortgage and that’s the other reason.
The other area where you could use bridging… You may own a buy-to-let property that’s unencumbered so, has no debt. You throw that into the mix, you could raise some money off the back of that property, providing additional security.
So, you can mix it up in many different ways but, in essence, they are the scenarios.
Understanding Loan-to-Value
And then you’ll get into, is it a first or a second charge? So, keeping it simple, you buy a property for a £100k. It needs a major refurb. On a bridging loan, you would probably get about 60% of the purchase price as the net advance, on the day that you buy.
And if you want me to expand on that as I’d say it’s probably one of the key questions in bridging…
You will hear some great loan-to-values being thrown around, you can get 70% or 75%. Normally the interest is retained and that means you not physically servicing the debt, monthly but actually what you are doing is… It might be 70% of £100k but you’re not given 70%.
That interest could be rolled up, maybe, for a year which means you’ll get 60 percent.
The key question to ask your broker or the bridging lender is, ‘On the day of completion when I buy the property, how much money will be sent to my solicitor?
And that can often catch a lot of investors out. So, we like to make that very, very clear.
More Articles with Rory
Debt Finance Vs. Equity Finance – Which is Better for Property?
How to Use Bridging Finance to Grow a Property Portfolio Quickly
Which Property Strategies Offer the Best Long-Term Potential?
How Can a High Net Worth Individual Invest in Short-Term Finance?
What is an SPV and Why are They Used by Property Developers?
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