Isn’t Bridging The Last Resort?
The first question I get asked whenever I mention bridging as an option for property investors is “Isn’t that expensive?” - usually accompanied by a sharp intake of breath!
My response is usually “Compared to what?”
If you’re planning to use bridging to finance your main residence, yes it is. The interest rates are higher than traditional mortgages. Historically, you would only use a bridging loan to bridge the gap between getting the money from the sale of your existing house and enabling you to get the mortgage on the new home. That’s why it’s called bridging.
Things have moved on significantly in recent years though, bridging is far more commonly used to make a profit on property investment, in a variety of situations.
There has been another big and more recent change too – the disparity between normal BTL mortgages and bridging finance has shrunk dramatically. Now the era of super-low mortgage rates has ended, perhaps never to return quite as it has been for the last decade, mortgages are a lot more expensive – but bridging finance isn’t!!
Why? Because bridgers are funded very differently to mortgage lenders and their cost of money is virtually unchanged – to the point the where cheapest bridging rates and to = the costlier mortgage rates have parity.
So when anyone moans about bridging being so expensive, that’s a clear indicator they are still living in the past. Bridging has never been more affordable than it is now.
However, as an investor who is aiming to make a profit either by buying and selling property or buying to let, bridging finance is like having a sledgehammer in your toolkit that will break down all the barriers in your path.
If you don’t have a big wad of cash sitting in your bank bridging finance gives you more flexibility and, with the right bridger, much better deals.
Is it more expensive than a buy-to-let mortgage? Yes, but it’s not more expensive than a joint venture. JV partners usually want a big chunk of the profits of a deal – often around 50%. Bridging lenders will want much less than 50% and, providing you’ve done your sums properly beforehand; you should never be giving away more than 25% of your total profit. That means you’ll make much more with a bridging loan than with a JV partner.
Another BIG factor - bridgers can be a lot less hassle than a private investor, who is emotionally attached to their money.
Also using bridging to fund your property purchases allows you to buy properties that any mortgage lender would consider unmortgageable – even though there is considerable profit in them.
There is one proviso – you need to know how to use it intelligently.
Smart strategies make bigger profits
Mortgage lenders will only lend on the amount you pay for the property. So it doesn’t matter if you negotiate a great discount or not, you’ll still have to find 25% of the full price as your deposit. The only advantage in negotiating the price down is that your 25% will be a bit less, if you get the buying price reduced.
Many bridgers operate on the same system, but not all. These is where it pays to know your way around bridging lenders (or have a good broker – and I can help you there too).
The secret is to find one of bridging lenders who will lend on the VALUE of the property, not the actual price you paid. Think about it – if you negotiate the seller down to 25% below the market price, you will get 70% of the VALUE from your bridger and only have to put 5% down. That gives you more money for refurbing the property.
The other plus is that if you can uplift the value of the property, when you refinance it you can pull out the deposit – or most of it and you’ve got a chunk to invest in your next deal, not trapped in your asset.
Buy smarter
The other plus about bridging is that it enables you to buy properties that are, technically, unmortgageable, but have tons of value locked into them. This gives you access to opportunities mortgage-dependent buyers don’t have. In addition, the seller of an unmortgageable property knows that they won’t get full market price – and you can negotiate down to as much as 50% below market value on some properties.
So – is bridging in expensive? Not if you’re using it to make much bigger profits that you wouldn’t otherwise be able to make.
Get smart and learn how to use bridging intelligently.
"Bridging finance explained" My beginners guide over on my YouTube channel
You can learn more here:
- Contact Kevin Wright over on his Facebook page.
- Book into the BRR Launchpad™ 2023 Event on the 11-12th March.
- Browse the Recycle Your Cash online training library by clicking here.
- Attend a 2023 Buy-Refurb-Refinance Summit Event - BRR Summit
