Mortgage Market Update: Adding Value To Your Property Through Bridging Options

Photo by Innova Property

Welcome back to my mortgage update!  This month I’m talking about how you can use bridging to add value to your property.  In the current market this is even more important to mitigate against a potential reduction in house prices.

I’m often asked about bridging when clients haven’t used it before, there is fear around using it when clients have had a bad experience previously; or just not used it to its full potential.

So, what are the benefits of using bridging?

Let’s start with why you would use bridging:

  • It allows you to buy the property that is otherwise unmortgageable – you effectively become a cash buyer. Properties without kitchens or bathrooms, in need of renovations, or where the planning or usage isn’t correct can be bought.
  • It allows you to move quickly – we can complete it in a few weeks without too many issues. This means that if you have a distressed sale, or the vendor wants a quick completion then you can offer that (and it can help negotiate a lower price too!)
  • It allows you to buy property to refurbish, and then move onto another mortgage (using the new, higher value) quickly without any early repayment charges.
  • It allows you to borrow 75% of the purchase price even if the rental figure doesn’t get you to this on a standard BTL mortgage. As rates have increased this is even more important. The aim would be to ensure that after a refurbishment or conversion, the rental would allow you to borrow 75% of the new value.

It also allows you to borrow for refurbishment costs.

Another advantage is that it allows you to borrow your refurbishment costs as well as funds towards the purchase.  You can do this in a couple of ways:

1. Upfront costs toward your refurb

You can borrow 75% towards the purchase of your property and then an additional 10% towards the refurbishment so a total of 85%. You do need to ensure that the total loan is under 75% of your GDV both for the lender and to ensure that you can exit your bridge.

This works well for light refurbishments where the EPC isn’t legal, or the property just isn’t in a lettable condition due to the décor, floor coverings or something similar.  We can use it for HMO conversions or heavier refurbishments providing there are no structural changes to the property.  The total refurbishment costs can be more than 10% of the purchase, but you would need to fund the rest.

2. Refurb costs in arrears 

Where the refurbishment is bigger, we can lend these costs in arrears. The lender will fund money towards the purchase and then all the works costs in arrears as you spend your money.  You can borrow a total of 70% of the GDV, and they will always fund 100% of the costs, so the remainder will be available for your day-one loan (minus fees and interest). The refurbishment costs need to be a minimum of about £60,000 to make it worthwhile.

This is great for larger projects, developments, commercial to residential conversions, and HMO conversions.  It allows you to minimise the amount you are putting into the deal and maximise the number of deals you can complete simultaneously.

So, what about the disadvantages? Are there any? 

If you have access to funds with a lower interest rate and overall costs, then it is a consideration to use that instead. This may be from a refinance of another property, a gift, or a loan from family or friends. This can work out less expensive, but you haven’t got the security of a mortgage valuation and lender legal to do those additional checks for you – this is a consideration so it’s not just a cost comparison. It all depends on how much risk you are willing to take!

When I find that clients have had bad experiences, it is usually due to not understanding the full costs involved – whether that is exit fees, monitoring fees, or extension fees. Knowing the full picture and ensuring you fully understand what you are getting into is so important.

We only work with reputable lenders who are transparent with their costings and deliver on what they say they do – there are still plenty that don’t though, so be careful!  We will work back from the endpoint, so where we can, we will use the same lender we intend to use for the term mortgage at the beginning to reduce your overall costs and reduce the risk on the refinance.

As always, it’s about doing your due diligence, knowing who you are working with, and all the costs upfront. Bridging is a means to an end and it’s so important not to lose sight of the prize!

As always, if there is a particular project you are looking at then please get in touch for a chat here.

About the Author:

Ellie Broadhurst is a specialist mortgage broker working at Baya Financial in partnership with The HMO Roadmap. She works with HMO property investors throughout their journey, from clients starting on their first project through to experienced portfolio landlords and developers. Learn more about Ellie here.