You might be thinking about using bridging finance to buy a property to refurbish, or to buy a property because you don’t want to risk losing the chance to buy it because you’re stuck in a chain sale. Which is why you’re looking into finding out more about bridging finance, and if borrowing on a bridge is worth the risk.
Bridging finance is a short term loan of 12 months or less for the purpose of buying property to refurbish and sell or refinance later, or to bridge-the-gap between buying a property using an interim loan before selling another property in order to repay the bridging finance.
Bridging in finance means to bridge-the-gap between an interim loan (bridging finance or gap financing) to buy property, before remortgaging or sale at the end of a project to repay the gap loan, or to bridge between buying a home on bridging finance until it’s repaid when the current house is sold.
What are the risks of a bridging loan?
There are a number of risks of interim finance, which include:
Bridging finance is short-term: Bridging finance is a gap loan, and is usually for just 12 months or less, which can make it very tight to turn the property around to remortgage or sell at the end of a project. Alternatively, it doesn’t give you much time to sell your current property if you’ve used gap finance to buy your next home whilst you wait for for your current property to sell.
Risk of repossession: As bridging finance is short term, this increases the risk of the property being repossessed if the interim loan isn’t repaid within the term of the loan.
High charges and rates of interest: The higher rates of interest and charges can easily eat into any profits of a project, which increases the risk of a project becoming unprofitable.
Limited time to sell property: With the short term nature of bridging finance it doesn’t give you much time to refurbish a property and sell it within the term of the bridge.
Not valuing up: There’s the risk that at the end of a project the property doesn’t value up at what you expected it would. This may leave you short if you sell the property, or out of pocket if you decide to keep the property and remortgage it to repay the interim loan.
A pandemic hits: If a pandemic hits in the middle of refurbishing a property purchased using bridging finance, the delays caused as a result of the pandemic may risk running out of time to sell or refinance the property.
Cannot sell the other property: If the bridging finance was used to bridge a gap between buying one property before selling another, it’s possible the other property may not sell in time, meaning the interim finance cannot be repaid before the due date.
Is bridging finance a good idea?
Bridging finance is a good idea if you are sure the project will make money when taking account of the high costs of interim finance, or if you are sure you will sell your current property and pay off the interim loan if you are using gap finance to bridge the gap to buy another property.
Having just used bridging finance myself to buy and refurbish a property, I’m not sure I would use this type of lending again, but I never say never again.
The reason I say this is because the loan took forever to get in the first place, as the bridging finance company were very slow and difficult to deal with. The costs associated with the bridging finance we used were very high too, which ate into the profit on the project too.
But the other problem we came up against is that the surveyor, who was instructed by the lender to remortgage the property, didn’t value the refurbished property at what we thought the property was worth. We managed to appeal the value given, but this added more time to the project and further depleted our profits.
Also, I personally wouldn’t use interim finance to buy another property to live in to bridge the gap whilst selling my current property. This is an expensive way to move house and is a very risky strategy too.
There are alternatives to bridging finance, which include:
Angel investor: Angel investment is a loan you receive from a person who is willing to lend money on a project at an agreed rate. Having an angel investor avoids complex task of using a bank or a bridging company.
Borrowing from friends or family: Borrowing from friends and family avoids the high risks and costs associated with borrowing on bridge finance.
Sell your existing property instead: If your reason for using interim finance is to buy a property you may otherwise lose because you’re in a chain sale, as you’ve not yet sold your current property, this is a risky strategy. So instead of adding the stress and excess costs of a gap loan, sell the property first. Take a read of this article linked to above and below too about how you could save £71,475 on your next mortgage, as this will give you similar advice and you may save a whole load of cash too.
Most gap loans are expensive in terms of the rate of interest charged and the level of fees the bridge lender charge to lend. These often includes charges at the start of the loan and at the end too. Legal fees also tend to be higher when arranging bridging finance to buy property.
What are the benefits of using bridging finance?
Buy property faster.
To buy property that conventional lenders will not lend against, for example if the property doesn’t have a kitchen.
Lent at a higher loan to value.
Buy property at a large discount.
Better cash flow, as the Interest is capitalised with the loan and paid at the end.
What are the disadvantages of bridging finance?
High lending costs.
Higher interest rates compared to conventional lenders.
Short term lending carries a greater risk of running out of time to repay the bridging loan.
The longer the bridge the more it will cost, and as interest rates are higher than normal, this will reduce the benefits of bridging finance.
Stressful.
If you don’t repay the bridge in time, you may face very high penalties.
You cannot normally let property financed with a bridging loan.
How much deposit do you need for a bridging loan?
The amount of deposit you need for a bridging loan depends on the lender and the type of property being purchased, but in some cases the deposit can even be as low as 5% if you manage to buy a property at significantly at below market value and use the right bridging lender.
How much can you borrow with a bridging loan?
You can borrow at the agreed loan to value percentage of the property’s value, which might be 80% loan to value, plus some bridging loans will finance the development costs too, which is normally calculated on the estimated uplifted property value after the building work is finished.
Final thoughts about what is bridging finance and is it worth the risk
Be careful when borrowing using bridging finance, as this is a risky strategy in property. There are many things that can go wrong when you buy property, and buying property using a bridging loan increases your risk.
Think very carefully before committing to borrowing with bridging finance to buy a property. If your reason to use bridging finance is because you’re stuck in a conveyancing sales chain, please read the following section first, and the articles linked the below.
Please don’t forget to read this before you leave…
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Article written by Russell Bowyer who has been investing in property since purchasing his first commercial property in the 1990's for his own Chartered Accountancy business. But his first property investment project was to turn an old dilapidated restaurant into a large 5-bed home, which he purchased for £117,500 and sold for £450,000 (to see an "after" photo of the house before it was sold see here: About). Russell owns a number of investment properties, which includes houses, flats and HMO's. More recently he has turned his creative side to investing in property using lease options. His largest lease option deal to date was to acquire 12 properties worth over £2 million for just £12, which means he paid just £1 to acquire each property!
