I teach people smart funding and that means understanding how to use bridging finance to make more money. The trouble is that as soon as I mention bridging there is almost always a sharp intake of breath! This is usually followed by the words “Oh, that’s expensive, isn’t it?”
If you’re planning to use bridging to finance your main residence, yes it is. The interest rates are higher than traditional mortgages. You would only use a bridging loan to bridge the gap between getting the money from the sale of your existing house to enable you to get the mortgage on the new home. That’s why it’s called bridging.
However, as an investor who is aiming to make profit either 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.
There is one proviso – you need to know how to use it intelligently.
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 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.
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.
If you’re thinking a Joint Venture (JV) is a better bet, think again. JV partners usually want a big chunk of the profits of a deal – often around 50%. Bridging lenders will want much less than 10% 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.
Get smart and learn how to use bridging intelligently.