If you need finance in a hurry but don’t like the rates associated with bridging loans, there is an alternative but you have to be organised. Andy Elley explains.
The rise in popularity of bridging has been well documented in recent years. It is particularly useful for landlords and developers who need to access property finance really quickly. I’m constantly amazed at the volume of calls I get every day from property professionals, often with sizeable portfolios and of considerable net worth, who find themselves in this situation. Usually, it’s because they are making auction purchases which have to complete within 28 days.
But as clients often tell me, bridging can be an expensive option with monthly interest rates ranging anywhere between 0.70% and upwards of 1.25% plus lender arrangement fees of 1-2%, title indemnity insurance, valuations, broker fees and legal costs – it all adds up!
But if you know that you are likely to require funds speedily over the course of a year, there is an alternative. It is cheaper than a bridging loan but you will need to have an unencumbered property you can put up as security and you’ll need to do a bit of advanced planning.
We can organise a 12-month loan facility on a fixed rate basis up to 60% loan to value which is available for you to use whenever you are ready. Of course rates will be higher than for a standard buy to let or commercial mortgage but much less than a bridging loan.
Here’s an example of how such a facility might work…
June: You own a property outright valued at £750,000 and, subject to a valuation, we arrange with the lender for you to use it as security for the loan. The lender agrees a 12-month loan facility which allows you to borrow up to £450,000 (60% LTV).
September: You attend an auction where you successfully bid to buy a house for £220,000. The property requires updating before it can be let out and you establish that refurbishment works will cost around £35,000.
You give me a call and I organise with the lender for a very quick re-inspection of the security (the property you own valued at £750,000) just to double check you still own it and it’s still standing! The lender gives the green light to release funds and you decide to draw down £260,000 immediately. There are no monthly repayments to factor into your budget at this point, although you will need to pay the lender 2% of the amount drawn down (£5,200 – which is why you drew down slightly more than the refurbishment costs).
October: A month later you go to an auction again and successfully bid on another property costing £180,000 which only requires a lick of paint and a quick tidy up before it’s ready to let.
You give me a call and I arrange for you to draw down £190,000 - the remaining funds. Remember, there are no monthly repayments to factor into your budget, just the 2% lender arrangement fee, this time (£3,800). At this point the lender may or may not decide upon another quick re-inspection (depends upon actual timescales).
April: Six months later the refurbishment works are complete and both properties are let. You get in touch and I arrange new, long term buy to let mortgages based on the increased value of both properties.
The buy to let mortgages allow you to repay the £450,000 plus all of the rolled up interest compounded over the loan period, which is calculated using the applicable fixed rate.
So, for a little bit of advanced organisation and just a small amount of administration each time you want to draw down funds, you will have saved yourself time and money. Of course you will still be liable for other costs (eg. legal and broker fees) but this type of facility is definitely cheaper and more flexible than standard bridging finance. Oh, and bear in mind that there are Early Repayment Charges in place for the first six month from the date of the first draw down of the facility.
It is also worth noting that the lender has another finance option for landlords and developers who want to borrow against rental property which already has a first charge mortgage in place (the property must have good equity and the first legal charge holder consents to a second charge over the security). In this case, the loan term is available for up to five years, with either a fixed rate of interest repaid at the end of the mortgage term, or a percentage of the uplift of the property value.
If either of these options are of interest, do get in touch. I am in the office most weekdays between the hours of 8.15am and 5.30pm. My direct line is: 01732 471644 or e-mail firstname.lastname@example.org. Alternatively, do call the main line: 0345 345 6788 where I or one of my colleagues will be able to help.
You might like to read other blogs and case studies by Andy Elley: