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The Case For Bridging

A bridging facility is an alternative to a mortgage, it is now increasingly being used in purchases for reasons we shall go into. As the name suggests, a bridge is a structure which helps you across an obstacle. This means it is supposed to be temporary to serve the investor for a short period of time, however it is a very expensive short term option, and you may end up digging a deeper hole if the project doesn’t go as expected.

It is unlike a mortgage, which leaves you at its mercy for what may seem like forever. Upon closer examination we find that mortgage is made up from two words: ‘mort’ and ’gage’. Mort comes from the Latin word mortuus from which we get ‘mortuary, mortal, death’. Gage means ‘hold or grip’. Therefore, mortgage is a death grip.

So in short a bridge helps you to cross shark infested waters, with the risk of falling off in your journey and the other seems be a slow strangulation until you die. In some countries that’s not the end of it as the mortgages are transferred to the next generation so they too can carry on the sentence.

______________________________________________________________________________________________________________________________________ Clearly these are not instruments anyone would want, as they both seem undesirable. The choices seem to be a possible quick death or a slow one, which may even outlast you and carry on for generations depending on the country you live in.

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So why would anyone chose to take one of these?

The obvious answer is without one most people cannot afford to purchase a property. The other reason is even if one did have the full funds to purchase a property in cash, it would not be wise to do so in a rising market. The reason being generally properties rise in value more than the interest the bank charges for the mortgage. Meaning if a property rises say 10% per annum then it is worth borrowing all the money at 5% to purchase this property. In the same way if you can purchase something for £5 and resell it for £10 you should carry on doing so. You also benefit from gearing, meaning instead of purchasing one property for 100% in cash, you’re in a position to purchase 4 by putting down 25% on each one and borrowing the rest of the funds.

Intuitively investors shy away from using bridging providers. The reason being is that they are seen to be loan sharks, with their high interest rates and fees for both arranging a loan and even an exit fee to leave them.

However despite the high rates and my own aversion to using bridging, the last few deals we have done we have used bridging to fund the deals, here’s why:

Even with the relatively high rates these particular projects will yield a higher rate of profit than the cost of the bridge. This means if the project makes 25% return, then it is worth getting money at 12%, as the project still works. A bridge reduces the amount of money required to be put into it. Bridging companies lend on the value of the property and many also fund the build cost, meaning less capital is tied up in the deal.

If applied in the correct way a bridging loan can be a very useful tool allowing one to move swiftly and without the hassle of going through traditional bank lending. So you can focus on the project in question without worrying whether the lender will approve your loan.

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I have two conditions when taking a bridge: one is the property must have at least a 20% margin and secondly it must be in an area which is increasing. The latter condition is restrictive, as there are not many locations going up in value in the UK.

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Central London is the obvious one, a large factor contributing to its growth is overseas money looking for a safe home in times of economic uncertainty.

To be frank I saw no need for bridging back in the pre credit crunch good days, especially in regards to residential property. Even when you purchase in auction you normally have 28 days to come up with the funds, if you fail to do so you generally have a further 2 weeks. 6 weeks is plenty of time to raise the rest of the funds using conventional lenders.

If the property was dilapidated, many purchasers would purchase using a residential mortgage or by using their main homes as collateral. With a BTL mortgage the loan is based on the rentability of the property and so if the property is not immediately rentable the loan will not be forthcoming. Even as a residential the risk here is if there is too much work the lenders may put a retention on the property, which means they will hold back on some of the funds. They also had products which were refurbishment products, so some lenders would loan you the property value plus an amount to do the property up.

However now the climate has changed and lending has become restrictive both in terms of time taken to approve a deal and the lenders being more selective in both their choice of the applicant and the projects.

As a consequence of this there are deals to be done which didn’t exist when lending was more abundant, hence this has now become fertile ground for bridging companies to grow prolifically. Bridging companies are fast and do not discriminate too much on the applicant, basically as long as you’re alive and not a terrorist they will pretty much grant you a mortgage. As far as the project goes as long as it’s in a good location and stacks up they will lend. They have fast turn arounds – typically a week. They will lend when intuitively the deal stacks up. Often main stream lenders will not lend even when the deal stacks up due to some procedural issue, or they may consider your application for 3 months only to then turn around and refuse the mortgage.

Furthermore at times bridging makes economic sense, as these lenders are prepared to lend more than main stream banks. This means the return on your money will be higher, the reason being you have put less money into the project.

For one particular project we applied for a conventional BTL mortgage, although I was doubtful it would be approved in time or for the right amount as the property wasn’t liveable – it was a dump. But scarily enough the last owner was living there in the same condition right until the day of completion.

We managed to use the same valuation for both the bridging application and the mortgage application so there was no further cost attached to progressing with both scenarios.

As I suspected the mortgage offer not only came late but the lender decided to keep a £100,000 retention.

On the other hand the bridging loan company not only provided 70% of the purchase price they also provided 100% of the build cost, this substantially reduced the amount we had to put into the deal. When I was doing the cash flow for both scenarios the bridging funds ended up giving a greater return on the funds put into the deal.

Luckily we didn’t wait for the offer and proceeded with the bridging loan as it would have thrown out our numbers, and it would have taken us past the completion date.

Another project we used bridging for was a large purchase of £5.2m. The property was part commercial and part residential, it had a temporary tenant for only 18 months and therefore did not fit a commercial lenders criteria. We didn’t want to tie up large amount of funds in the deal as they can be used to execute further deals.

The only way was to use bridging to release funds and keep them flowing and so this is what we did to release money.

Due to the current climate bridging may provide a much needed solution but it needs to be used with caution and the worst case scenario must be allowed for.

The Real Deal

Two studios in Notting Hill

  • Both can be purchased for only £290,000 each
  • Off market deals
  • In a highly desirable street
  • These are in a period conversion
  • Rental of £220pw for each one
  • Rare to find anything at this price given the location
  • Fresh leases will be granted

Call us now if you are interested

Suresh Vagjiani

Sow & Reap

A Property Investment Company

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!Tips of the Week

Caution must be applied when purchasing Below Market Value properties, are you buying cheap because no one else is purchasing them? Will the price drop even further in years to come?

Remember always to see an investment from the markets’ eyes and not your own.

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