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The benefits of bridging finance can be realised at much lower cost, for those lucky enough to be in the right circumstances.
Falling in love with a beautiful house and buying it with a 100% loan before selling an existing, highly mortgaged home, is a classic suburban nightmare: the hopeful dreamers fail to sell their existing property and end up with no home at all. In practice, almost all bridging loan borrowers have a clear exit route. For home buyers, it’s often the completion of a sale which has already exchanged. For investors, it is the ‘ready to rent’ status of a renovation project. Investment and home buyers alike, though, often have options which can greatly reduce the costs and risks of bridging, if only they take the trouble to look.
Why bridging loans are expensive
Bridging loan fees and rates are comparatively high because they last for just a few months, yet require set up procedures similar to mortgages which last for decades.
Affordability is not calculated or taken into account (it’s all about the assets). Expect lender fees of 1.5% to 2%, a broker’s fee, and interest payments based on between 0.48% to 0.6% per month for a first charge, or 0.6% to 0.7%, for a second. With fees based on loan size plus rates pushing 8% pa, reducing the size of the bridging loan will reduce costs proportionately. For home buyers, this means looking at income and other assets with the potential to secure lower cost finance.
Using other assets and income to minimise the bridging loan
Loans against other secure assets should cost less than bridging. This normally excludes the likes of boats and jewellery, but can include other properties, bonds, blue chip shares and savings policies. For one client, we recently used this approach to save £8,000, relative to a quote obtained elsewhere. This was achieved primarily (there were other factors) by securing £250,000 of the £670,000 he needed against his existing home, rather than bridging the whole amount. This cut the lender’s fee by almost £4,000, with interest on the £250,000 set at 1.86% pa, compared with 5.4% pa for the £420,000 bridging loan. In a similar way, another client saved proportionately even more, because we were able to reduce the bridging loan to less than 50% of property value, qualifying for an interest rate lower by 4% pa.
Alternatively, if your other assets are limited, but your income secure and healthy, an increasing number of private banks and provincial building societies will lend based on income, rather than assets. Being around 4.5% pa with a 1% fee, such loans will, again, help to reduce the size and higher cost of bridging the whole sum required.
Convertible arrangements for buy-to-let investors
A basic principle of buy-to-let mortgages is that they are for properties that can be let. Properties which are not – because, for example, they need renovating first – represent a whole different risk profile and are thus excluded. For investors buying something which they are confident will be lettable within a short period, this is a frequent frustration. Again, if the equity is there in other assets, it’s always best to borrow against those. If not, we can schedule integrated, consecutive loans arrangements, in which a surveyor assesses lettable and capital values before, and after, the renovation. A bridging loan covers the renovation period, to be replaced by a standard buy-to-let mortgage when the renovation is signed-off. The investor thus knows from the outset what the costs and rates will be – and the cost of the build programme over-running.
Bridging can thus be much less expensive than you might assume. Better still, reducing the amount of ‘standard bridging’ by also borrowing against other assets or income almost always creates greater flexibility on timing and other terms, too. Reduced risk and cost are rare but most welcome bedfellows.
Your home may be repossessed if you do not keep up with repayments on your mortgage