Auction Bridging Finance – What is a Mortgage Bridge Loan?

15/05/2018
When you buy a home using an auction, you won't know exactly how much you'll have to pay for it until you've made a successful bid. You'll have to pay 10% of the selling price after winning the bid (effectively you are exchanging contracts at this point), as well as the auction house's costs, but you may not have sufficient funds in place to cover the remaining balance within the 28-day deadline to complete your purchase. So what do you do?

This is one of the chief reasons for applying for auction bridging finance. You apply for a bridging loan, which essentially is a rapidly delivered advance of finance subject to meeting the relevant lender's criteria. Because of the much-speedier-than-normal application process and delivery of the monies, bridging finance costs considerably more than a normal mortgage in terms of interest rates and there are frequently one-off product fees to pay as well.

So auction bridging finance gets you 'over the line in time' regarding being able to buy a property, but in order to keep costs as low as possible, you have to look to move your borrowed finance to a product with a lower interest rate as soon as you can; you'd typically use a more conventional mortgage for this.

This article looks at bridging finance in the context of buying a property at auction and considers the following:




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Additionally, your bridging finance lender may require you to get independent legal advice (click to find out more), particularly if you are buying a property at auction in a company name. We can also provide this service.



    1
    How does bridging finance differ from a conventional mortgage?
Actually, you can think of a bridging loan as a kind of short term mortgage in the first instance and other similarities to conventional mortgages include:
  • The amount the lender will give you is determined by the value of the property
  • The lender takes a charge over the property as security – meaning they can repossess it if you default on the loan
  • You pay interest for the agreed loan term, then pay the loan back at the end
However you need to understand the differences clearly:
  • Mortgage terms can be 25 years or more whereas bridging finance is generally for 12 months or less.
  • Mortgage interest rates are much cheaper; at press time they are less than 5% for most borrowers whereas bridging finance rates might be anything from 8% at lowest to as much as 15% or more.
  • Bridging lenders are less concerned about your personal income which enables you to get a bridging loan even if your earnings are low.
  • Bridging lenders aren't concerned about potential rental income; after all, the property you're buying might be empty for the whole of the loan term.
  • Bridging lenders aren't overly concerned about your property's condition (so, for example, no bathroom? No problem).
  • Bridging finance can be arranged much more quickly; weeks or even days rather than months.
  • The finance provided requires a charge on the property. This might be in addition to one already on it in which case the first charge lender has to agree to it.

Free Mortgage Consultation, 100% independent with access to the whole of the mortgage market.

 
    2
    Why would you use bridging finance to buy a property?
We've stated that bridging finance 'fits the bill' for buying a property at auction, but what are the general reasons why you'd use bridging finance to buy a property?

    1
    You don't want to hold the property for very long
This also includes where you want to remortgage quickly to realise an increase in value.

If you wanted to flip a property you wouldn't use a mortgage because a mortgage is intended, as stated previously, for paying back over a number of years. Therefore you're left with getting a bridging loan or paying with cash.

You might, alternatively, want to refurbish a house to increase its value then borrow against its higher value. In that situation, bridging is appropriate too: you'd use bridging to pay for the refurbishments to increase the value, then take out a mortgage based on the property's new value.

    2
    Speed matters
This is naturally the case when it comes to property auctions. You can arrange bridging finance to look after a shortfall in your cash reserves to pay the balance on an auction property because you can arrange the loan in weeks rather than months. 

This means, in the auction context, that you might arrange bridging finance before the auction itself, but you might also be able to arrange it after the auction has taken place.

This also allows you to compete with cash buyers in situations where you can get a good deal by moving quickly. You might use bridging finance in any case where the seller is willing to sell at a discount if you can complete quicker than a mortgage would allow you to.

    3
    Property isn't mortgageable
Mortgage lenders generally require a property to be habitable/rentable before they'll consider lending against it. So a bridging loan can enable you to buy a wreck of a property, refurbish it, then take out a mortgage to repay the bridging loan.

It's clear that some of these scenarios can overlap.


    3
    How much can you borrow?
This depends on the value of the property involved - potential rental income and your personal income, as previously stated, don't come into it generally.

That said, bridging finance lenders frequently address the 'value' aspect of the loan to value calculation differently.

Mortgage lenders class the value of a property for purchase purposes as the lower of its current value or the purchase price. This means that if you 'bag a bargain', say you buy a property worth £120,000 on the open market for £100,000, the lender will value it at £100,000.

This means that if the lender was to grant you a 70% loan to value mortgage, the most you'd ever get would be £70,000, not £84,000.

With bridging, lenders variously might lend:
  • Using the same basis as a mortgage lender (like the above example); or
  • Using the current market value rather than the mortgage lender basis (so in the above example, you'd get as much as the £84,000 on a 70% loan to value); or
  • Using what's termed the Gross Development Value (GDV) - this is what the value of the property is projected to be worth after you've completed any planned works.
If a lender does take the GDV approach, they might decide to give you the money in stages, perhaps only giving you a sum based on current value to begin with and the balance at the end of the refurbishment.

More borrowing, however, always costs more in terms of higher interest charges.
As with applying for a normal mortgage or remortgage, a bridging lender will require you to book and pay for a valuation carried out by a RICS surveyor. You should always expect the valuer to take a conservative position, as they are looking after the interests of the lender.

NB Additional Information may also be required

Although bridging finance, as stated, doesn't depend on your income and spending or the potential rental value of your property, your lender might require you to provide other additional information related to you and not the property.

This might include:
  • Details of previous experience regarding the type of project you're considering (say for example that you're looking to convert a house into a house of multiple occupation (HMO) for renting out.
  • Details of how you intend to pay the loan back; if you're looking to repay using a remortgage, how likely are you to get one? If you're looking to sell quickly, how likely is it that the property will be saleable?
  • Evidence that you'll be able to repay (known in this context as 'exit') before the term of the loan runs out.
  • Details of other assets you hold; this is so the lender knows they can pursue you for what you owe it if you default on your repayments and selling the property won't clear the debt.
  • Details of your income - relevant if you intend to repay monthly

An independent mortgage broker can guide you through different bridging loan lender conditions and requirements; call 0333 344 3234 (local call charges apply) if you'd like to have a FREE bridging loan broker consultation.


    4
    What are the fees involved and what is the loan structure?
Fees vary greatly depending on the lender involved and the interest rate is just one component.

Other fees regularly charged for a bridging loan include:
  • Initial valuation fees
  • Facility Fee or Arrangement Fee, which is frequently around 2% of the loan
  • Lender's legal fees (as well as your own)
  • Exit fee - this might be about 1% of the loan
  • Other fees - depends on the lender
  • Broker fee; depending on the broker, this can often be 1% of the loan (although use of a broker may 'pay for itself')
So your fees might be interest + up to 3% of the total loan as well as two sets of legal fees, however if you can make a profitable deal overall, the expense can be worthwhile.

Loan Structure

Bridging loan lenders generally deduct their fees from the gross advance before it's paid over to you.

Bridging Loan Example
Let's say you borrow £100,000 with an arrangement fee of £2,000 and £700 legal fees, you'll receive £97,300 as the net advance into your bank account. If you have exit fees, you'll pay these at the end, when you repay in full. This calculation doesn't include the interest element, which is examined next.

Interest
There's normally three ways to pay the interest on a bridging loan:
  • Lender withholds the interest - this means it's deducted, along with the fees, from the gross advance at the start
  • You roll up the interest - this means you pay it in one lump sum at the end
  • You service the interest - this means you make an interest payment every month just like a conventional mortgage.
Your lender might decide which of these approaches it takes or you may have a choice.

Each of these has its own pluses and minuses. Here's some thinking on all three methods:
  • The withholding method means you're paid up at the start and the interest can't compound, however you'll end up with less money in your bank account to start with, which might mean a shortfall for your development plans.
  • Rolling up means you don't have to think about paying the interest until the end and means you'll get more in your bank account to begin with, but it also means that you'll have to budget for the payment at the end and all the interest will be compounded, making it more expensive.
  • Making regular monthly repayments won't reduce the size of the loan at the start of the period and your interest won't be compounded. However, you'll have to make regular monthly repayments and run the risk of missing payments.

    5
    How do you get a bridging loan?
As well as paying for your lender's solicitor, you have to instruct your own solicitor.

Need a Bridging Loan Solicitor?

Our solicitors are experienced in handling the legal side of bridging loans for you, acting speedily and efficiently.

* Experienced bridging loan solicitors – Efficient Work – Speedy Execution

If you're buying a property at auction, the solicitor acting for you in the purchase also handles the lending element.

Your lender asks your solicitor to send over all the information they usually obtain in the course of buying a property: searches, insurances, checks of the Land Registry, and so on. The lender’s solicitor will then double-check all this information, raise enquiries about anything that’s missing, then eventually approve the loan to be released.

At this point, your solicitor can exchange and complete on the transaction – with the lender sending the funds over in time for completion day.

This can all be done comparatively quickly - a bridging transaction can sometimes be finalised in under a week - something which would never occur with a conventional mortgage involved.

Realistically, however, you'll have to factor in:
  • How long the lender's valuer takes to be booked, inspect and make their report;
  • How long your solicitor takes to send across the required information to the lender and respond to queries (which is why you should choose an experienced solicitor);
  • How long you take to get required information such as searches (we can expedite this);
  • How quickly the lender and lender's solicitor work;
  • How long the lender takes researching additional information about you; and
  • If the loan is to be a second charge loan, how long it takes to get consent to proceed from the primary lender.

    6
    What should you consider when taking out a bridging loan (risks)?

    1
    Do the benefits of taking out the loan exceed your costs?
You must deduct your borrowing costs from your projected profit. This is easier to do in the case of flipping a property, but if you intend to hold on to the property for any length of time, you should carefully weigh up whether what you're going to pay extra for speed is worth it compared to just getting a conventional mortgage.

    2
    Do you have a workable exit strategy?
These loans are very expensive and if you have to extend how long you have one for, lenders often increase their rates or impose extra costs. It's better to have a bit of flexibility in your term rather than having to pay for an extension. On the other hand you should check out whether your lender imposes an early repayment charge should you manage to complete things earlier than expected.

You should consider what would might happen if things go wrong; if you can't sell your property quickly at a particular price, can you cut your margin such that it will sell and you can still break even?

    3
    What's better for you, rates or terms?
You need to weigh up what works best for your individual project. The cheapest loans may not offer you as much finance and your circumstances may be examined more and the process might be slower. Alternatively if you want a faster loan you'll have to pay more for it.

You should carefully weigh up whether to consult a mortgage broker; they may be able to save you time in comparing different bridging loan products and find you the best one for your needs, although you may have to pay extra for their services.

We offer a free bridging finance mortgage broker consultation - just call 0333 344 3234 (local call charges apply) to book yours.


Related News Articles

 
Auction Conveyancing - Our buyers guide
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