Alternative Property Finance options (Bridging Loan)

[NicoG]

Morning all,

I'm fairly au-fait with conventional mortgages and finance, but feeling a little short of knowledge on the particular type of finance I am contemplating....

The scenario:

• I have had an offer on a grade-II property accepted
• the property is not in a condition where (as I understand it) a conventional mortgage is viable (no kitchen and partially renovated)
• ultimately the full purchase price is coming from another property that I own which is on the market. Equity in this property is broadly equivalent to the full PP of the one I want to buy with some left over for works.
• I will set-about doing work on the the property so that it is capable of being refinanced by conventional lending as quickly as possible .

The listed property is a bit of a horror show in all sorts of ways - there are many issues with the title and and the creation of the leasehold title (like the fact that it is not yet in existence). Nothing that can't be sorted in the fullness of time, but I suspect this will not be a fast transaction...

IAAL and can deal with all these title matters myself. My only concern is that the seller get their ducks in a row rapidly (although this is quite unlikely) and I will come under pressure to exchange before I have exchanged on the place I am selling to fund the purchase. There are no linked transactions for the seller....

So, the idea of having some short-term finance lined-up for the purchase (only if I need to) has occurred to me. I am loosely calling this a bridging loan.
I don't know a lot about these, so my questions are:

1. Can the bridging loan be secured as a first charge against the listed place (which is not capable of a normal mortgage) even though it needs work?
2. or, does the bridging loan need to be secured as (what will be) a second charge on my "home" (which is neither the property I am buying or the property I am selling...)
3. Am I mad to be considering this course of action? I anticipate that bridging finance will be orders of magnitude more costly that conventional lending.
4. am I missing a better way to do this?

Just for clarity, and anticipating the sensible question here; no, there is not quite sufficient equity in my home to secure additional borrowing against it to fund the purchase...

Thanks,
Nick.

[CaiosH]

NicoG said:

Morning all,

I'm fairly au-fait with conventional mortgages and finance, but feeling a little short of knowledge on the particular type of finance I am contemplating....

The scenario:

• I have had an offer on a grade-II property accepted
• the property is not in a condition where (as I understand it) a conventional mortgage is viable (no kitchen and partially renovated)
• ultimately the full purchase price is coming from another property that I own which is on the market. Equity in this property is broadly equivalent to the full PP of the one I want to buy with some left over for works.
• I will set-about doing work on the the property so that it is capable of being refinanced by conventional lending as quickly as possible .

The listed property is a bit of a horror show in all sorts of ways - there are many issues with the title and and the creation of the leasehold title (like the fact that it is not yet in existence). Nothing that can't be sorted in the fullness of time, but I suspect this will not be a fast transaction...

IAAL and can deal with all these title matters myself. My only concern is that the seller get their ducks in a row rapidly (although this is quite unlikely) and I will come under pressure to exchange before I have exchanged on the place I am selling to fund the purchase. There are no linked transactions for the seller....

So, the idea of having some short-term finance lined-up for the purchase (only if I need to) has occurred to me. I am loosely calling this a bridging loan.
I don't know a lot about these, so my questions are:

1. Can the bridging loan be secured as a first charge against the listed place (which is not capable of a normal mortgage) even though it needs work?
2. or, does the bridging loan need to be secured as (what will be) a second charge on my "home" (which is neither the property I am buying or the property I am selling...)
3. Am I mad to be considering this course of action? I anticipate that bridging finance will be orders of magnitude more costly that conventional lending.
4. am I missing a better way to do this?

Just for clarity, and anticipating the sensible question here; no, there is not quite sufficient equity in my home to secure additional borrowing against it to fund the purchase...

Thanks,
Nick.

I’m a mortgage broker (not bridge loans) & small-scale developer. I have used bridge loans myself.

1. Yes, first charge on the new purchase and also a charge on the current residential (If you dont have cash to use as deposit).
2. See above.
3. If the property isn’t mortgageable then its either a cash purchase or a bridge.
4. Raising money from other assets.

Bridges can be expensive if the project takes longer than you expect. But they are good in that they open up possibilities and can be used to reduce the risk of running out of money before completing a renovation.

You would probably be able to get a bridge for 75% of the purchase, but in reality, with fees accounted for it works out at around 68% net towards the purchase. Depending if you’re paying the interest as you go or rolling up. A bridge can allow you to be cautious and have excess capital in reserve. Its not easy to lend money for the renovation itself, so lending more than required for the purchase can be good to maintain a healthy capital reserve. You really dont want to run out of money before the property is mortgageable.

[CaiosH]

I’ve written the above based on the bridge exit being a remortgage.

But reading what your post again. Your exit is more likely the sale of another property. But from the way you’ve written it, "some left over for works". It sounds like thats dependant on the cost of works, so could likely be an exit from the bridge that’s a combination of sale of another property and a small mortgage.

Whatever you think its going to cost to put right, as a worst case double that figure! :-)

[NicoG]

CaiosH said:

I’ve written the above based on the bridge exit being a remortgage.

But reading what your post again. Your exit is more likely the sale of another property. But from the way you’ve written it, "some left over for works". It sounds like thats dependant on the cost of works, so could likely be an exit from the bridge that’s a combination of sale of another property and a small mortgage.

Whatever you think its going to cost to put right, as a worst case double that figure! :-)

Thanks for your reply.

The ideal scenario would be that the other place sells fast enough to allow a simultaneous exchange on the project property, so essentially I would be buying it outright with cash. That would take all the pressure off and most likely allow me to finance the works by taking a FAR smaller loan (possibly an unsecured loan through my bank) and the rest "just cash".

Once the work was done, I would refinance the property via conventional lending, hoping that the value would then be far (£100K??) higher than the PP, meaning I could extract most (but not all) of what I had put in, and repay the unsecured loan....

the bridging loan would only be required if this Plan A proves not to be possible. Some preliminary research suggests the effective annual rate of interest could be about 10-12% and then there's a set %fee too.

I hear ya on the "whatever you think, double it advice" - I've done some smaller projects, but this one is night-and-day more involved and tricky...

[CaiosH]

NicoG said:

Thanks for your reply.

The ideal scenario would be that the other place sells fast enough to allow a simultaneous exchange on the project property, so essentially I would be buying it outright with cash. That would take all the pressure off and most likely allow me to finance the works by taking a FAR smaller loan (possibly an unsecured loan through my bank) and the rest "just cash".

Once the work was done, I would refinance the property via conventional lending, hoping that the value would then be far (£100K??) higher than the PP, meaning I could extract most (but not all) of what I had put in, and repay the unsecured loan....

the bridging loan would only be required if this Plan A proves not to be possible. Some preliminary research suggests the effective annual rate of interest could be about 10-12% and then there's a set %fee too.

I hear ya on the "whatever you think, double it advice" - I've done some smaller projects, but this one is night-and-day more involved and tricky...

You can’t really compare an annualised bridge rate to conventional mortgages because they are for shorter terms and higher risk situations / properties. For that there is always going to be a premium for what is a bespoke product. If you compare over a shorter term to a conventional mortgage and include the early repayment charges on a conventional mortgage then you find a fairer comparison.



Be sure to check the eligibility for the remortgage. Pay attention to lender criteria that may affect you.

• Remortgaging to pay off a loan will be considered ‘debt consolidation’. Most lenders have tight criteria around this.
• Your debt-to-income ratio at the time of remortgage with the unsecured loan in place.
• Day 1 remortgages (not many lenders allow a remortgage within 6 months of purchase).

I’m perhaps being overly pedantic and cautious to raise these. But after doing projects early post credit crunch and battling with changing mortgage criteria. I’ve a lasting instinct to tread carefully with projects and finance plans.

Edited by CaiosH on Monday 11th March 12:14

[ARHarh]

I know nothing about these sort of things, and just thinking out load. What do you need for it to qualify as having a kitchen? And could this not be fitted by you, before getting a mortgage. Eg a sink and cooker are easily bought and installed. The vendor would surely let you take this risk if they want to sell.

[NicoG]

CaiosH said:

NicoG said:

Thanks for your reply.

The ideal scenario would be that the other place sells fast enough to allow a simultaneous exchange on the project property, so essentially I would be buying it outright with cash. That would take all the pressure off and most likely allow me to finance the works by taking a FAR smaller loan (possibly an unsecured loan through my bank) and the rest "just cash".

Once the work was done, I would refinance the property via conventional lending, hoping that the value would then be far (£100K??) higher than the PP, meaning I could extract most (but not all) of what I had put in, and repay the unsecured loan....

the bridging loan would only be required if this Plan A proves not to be possible. Some preliminary research suggests the effective annual rate of interest could be about 10-12% and then there's a set %fee too.

I hear ya on the "whatever you think, double it advice" - I've done some smaller projects, but this one is night-and-day more involved and tricky...

You can’t really compare an annualised bridge rate to conventional mortgages because they are for shorter terms and higher risk situations / properties. For that there is always going to be a premium for what is a bespoke product. If you compare over a shorter term to a conventional mortgage and include the early repayment charges on a conventional mortgage then you find a fairer comparison.



Be sure to check the eligibility for the remortgage. Pay attention to lender criteria that may affect you.

• Remortgaging to pay off a loan will be considered ‘debt consolidation’. Most lenders have tight criteria around this.
• Your debt-to-income ratio at the time of remortgage with the unsecured loan in place.
• Day 1 remortgages (not many lenders allow a remortgage within 6 months of purchase).

I’m perhaps being overly pedantic and cautious to raise these. But after doing projects early post credit crunch and battling with changing mortgage criteria. I’ve a lasting instinct to tread carefully with projects and finance plans.

Edited by CaiosH on Monday 11th March 12:14

I get what you're saying, and thanks for alerting me to the lender criteria that I will fess-up to not having considered, However, by the time the remortgage happens that would be a way down the line after the works are completed. so...

....Even if I did initially have to go the bridge route, by the time I drew down the (re)mortgage advance, the bridge would already have been repaid by the proceeds of sale of the property that I am hoping will be sold before completion of the purchase anyway so there would be no borrowing on the property...

If I'm understanding your point about the salary/debt ratio correctly, this is unlikely to matter, since the remortgage would be a BTL product anyway, and so affordability assessments would presumably be made on the income from the property alone, as opposed to my own month-to-month financial situation/affordability (like they are on the one I'm selling...)

Totally get that the ERCs on a conventional mortgage (even a tracker these days apparently....) would level things out with costs of bridge finance was I to repay a conventional mortgage inside of the first year...

[NicoG]

ARHarh said:

I know nothing about these sort of things, and just thinking out load. What do you need for it to qualify as having a kitchen? And could this not be fitted by you, before getting a mortgage. Eg a sink and cooker are easily bought and installed. The vendor would surely let you take this risk if they want to sell.

You're right that a "kitchen" can be something fairly Heath Robinson if push came to shove, but this "kitchen" doesn't have wiring, or plumbing, or plaster on the walls !!

The idea has occurred to me though - "offering" to go in and install a (temporary) kitchen with the works needed to plumb in it etc might end up costing me a lot less than bridging finance, but as I have told others, the kitchen (or lack thereof...) is a long way from the most serious problem this property has!

[Panamax]

I hope you have fully grasped just how time consuming and difficult it can be to move forward with changes to a listed property. Link that with the hefty cost of bridging finance (which you've already identified) and I suspect an unmortgageable listed property is better suited for a cash buyer.

[bennno]

To echo comments below work on a listed building often cost >2-3x as much as non listed

They often take 6 months + for heritage officer permission, they'll be insisting on material specifications, statements of works, heritage recording, original materials to be used

It took 2 years in my case and they still wanted to caveat almost every aspect with the need to reapply to discharge further conditions.

Then you get stuck in an argument between the building regs teams and the heritage officer - which rumbles on

You do appear to have contradicted yourself in your first post - suggesting you've sufficient equity in your current property to buy this one?

Best way is to raise extra funds on your current property and then top up any excess with a bridging loan perhaps....

[NicoG]

bennno said:

To echo comments below work on a listed building often cost >2-3x as much as non listed

They often take 6 months + for heritage officer permission, they'll be insisting on material specifications, statements of works, heritage recording, original materials to be used

It took 2 years in my case and they still wanted to caveat almost every aspect with the need to reapply to discharge further conditions.

Then you get stuck in an argument between the building regs teams and the heritage officer - which rumbles on

You do appear to have contradicted yourself in your first post - suggesting you've sufficient equity in your current property to buy this one?

Best way is to raise extra funds on your current property and then top up any excess with a bridging loan perhaps....

I don't think I have contradicted myself - I made a deliberate distinction between:

• "another property I am selling" (in which I have sufficient equity to buy the listed place outright with some left over for works); and,
• my "home" (in which I do not have sufficient equity to raise the capital required to buy the listed place outright)

The whole point is that if the "other property" sells quickly enough, the need to have bridging finance at all, with all the complexity and cost that brings, falls-away completely...

[NicoG]

Panamax said:

I hope you have fully grasped just how time consuming and difficult it can be to move forward with changes to a listed property. Link that with the hefty cost of bridging finance (which you've already identified) and I suspect an unmortgageable listed property is better suited for a cash buyer.

I do. The works have already been started, and so essentially I will be finishing them with no liability for the criminal offences of making unauthorised changes if those changes were made before my ownership. I do FULLY appreciate however, that the consequences of failure to comply with an order to remedy those changes will attach to me.

So, I have been able to scrutinise some fairly detailed LBC and PP documents already, and won't be completing unless and until I know that the works I am doing will not be likely to fail any future inspection/sign-off as to their compliance with the LBCs that were given.

I will be actively involving the appropriate authorities from the outset, in the hope that adopting such a collaborative approach from the beginning will make things run more smoothly.

The last thing I want it to be paying a grand a month in interest waiting for the authorities' cogs to turn...

[bennno]

NicoG said:

I don't think I have contradicted myself - I made a deliberate distinction between:

• "another property I am selling" (in which I have sufficient equity to buy the listed place outright with some left over for works); and,
• my "home" (in which I do not have sufficient equity to raise the capital required to buy the listed place outright)

The whole point is that if the "other property" sells quickly enough, the need to have bridging finance at all, with all the complexity and cost that brings, falls-away completely...

In which case just raise the funds against the other property you are selling and / or your home?

You only need to raise enough to buy it, then when you sell the 'other property' you can pay off the loans and have enough left for the works.