There are many different types of bridging loan - the secret is knowing the difference and ensuring you get the one that best fits your investment.
Despite most people’s response to bridging being a sharp intake of breath, followed by the observation “Isn’t that expensive?”, bridging is actually a very effective way to finance an investment and has all kinds of advantages. If you don’t have the money yourself it’s almost certainly going to cost less than a JV where you have to give away a big chunk of your profits to your partner, who is providing the cash.
The first step is to understand the different types of bridging finance. In essence there are five types of bridge.
1: Purchase bridge
This has a lot in common with mortgages. The loan is structured in relation to the lower of the purchase price or value. So if the property is valued at £100,000, but you have a motivated seller who wants a quick sale and is willing to accept £90,000 - your bridge will be based on £90,000 - usually 70-75% of that, so your deposit will be 25-30% of the £90,000 – not the £100,000.
2: Market value bridge
This is based on the lower of the market value or the asking price. This is what I describe as the ‘shrink the deposit strategy’. If you buy at market value, where the asking price is actually higher, your deposit will shrink in line with the difference,
3: Refurb bridge
This is a really useful strategy if you don’t have enough money to pay the deposit AND do a full refurb. The bridge is based on the purchase price and refurb value too. You won’t get the whole amount in one hit, but the lender will release 70-75% of purchase price to facilitate the purchase (with your deposit making up the full 100%).
Typically, the refurb costs will be split into three instalments and then expect you to do the first third of the refurb, using own money. When you’ve done that the bridger’s valuer does a survey, signs it off and then you get the first third of the refurb money. You do this with the second third and then again when the refurb is complete.
This is a great way to fund a substantial refurb without needing a huge wad of your own cash.
4: Done-up value bridge
This where you agree delayed completion with the seller. This strategy is based on getting the seller’s agreement to get the keys to the property on exchange not on completion. You will also need to get their permission to enter the property and do a refurb.
The refurb needs to be done between exchange and completion.
When it’s done, the bridger’s valuer will carry out a survey and assess the done-up value, which is the amount they will base their bridging loan on. You can then complete and either sell or refinance the property.
5: Cross-collateral bridge
If you don’t have the cash deposit but have a property you already own with either no mortgage or a low mortgage. The bridging lender will give you a single loan against two properties - the one you own and the one you’re buying.
If you have a property with no mortgage, you may even be able to get a bridge for enough to cover your deposit, stamp duty, legal fees and refurb costs.
You will need at least 50% equity in your current property, the bridging loan is a second charge loan, which sits on top of any existing mortgage.
If you don’t have much cash, but own a good percentage of your current property, this is a great way to build your investments. Best of all you can use cross collateral bridging with any of the other four categories to avoid having to put down a cash deposit.
This is all outlined in this video
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