The prices and the values in the property world continue to fluctuate. The prices in some parts of Britain are still increasing, whereas certain areas are fairly static or even declining.
Yet investing in property is still an attractive proposition, whether you are considering a buy-to-let opportunity or are more interested in flipping the sale through property development. Investors still see the physicality of bricks and mortar a reliable investment, as long as they are thorough in their planning and treat it like a business.
Investing in property does require funding to start. The most obvious choice is to apply for a mortgage. However, this is not always an option for some properties which do not meet the criteria for mortgages, or if finance is needed quickly, so consideration must be given to other forms of finance. One such method is a bridging loan.
- Using a bridging loan in place of a traditional loan
- What types of property can you purchase with a bridging loan?
- Does the property need to be habitable to get a bridging loan?
- Can I buy land with a bridging loan?
- Can you use a bridging loan to buy property at auction?
- How quickly can you get a bridging loan?
- Do you qualify for a bridging loan?
A question often asked is why would you use a bridging loan in place of a traditional mortgage? After all, mortgage funding is designed with property in mind, so what are the benefits of a bridging loan that a mortgage can’t offer? To answer that, let’s first look at the similarities and differences between the two types of finance.
- A bridging loan is a short term form of finance usually around 6-12 months in duration.
- The amount of the loan is decided by the value of the property.
- The approval process is quick (especially at companies like Novellus who have no credit committee to obtain approval from), so the cash is available sometimes only days after it has been applied for.
- Lenders take a ‘charge’ as a form of security, which is generally property, so if a borrower defaults on their loan this can be repossessed to cover the repayment of the loan.
- When making a decision on whether to award the loan or not, lenders look at your ability to pay the loan off and what exit strategy you have in place.
- Interest is paid on the loan, although with Novellus there are no early repayment fees.
- A mortgage has a charge as security against default; this is generally the property that the mortgage is being used for the purchase.
- A mortgage incurs interest fees, which are payable at regular intervals throughout the lifetime of the loan.
- Loans are only made against habitable properties.
- The mortgage amount is agreed against the property value, although income is a deciding factor in whether an applicant will be given the loan or not.
- A set amount of time is given to pay the debt off.
- If a borrower pays off the loan early you may incur extra fees.
- It usually takes a while (several months) to arrange and approve.
- The repayment period can be anything up to 25 years.
So there are similarities and differences between bridging loans and traditional mortgages. Bridging finance with Novellus can be a perfect option when you need finance fast or if you are considering a property that you can not get a mortgage for, such as if it is classed as uninhabitable, or if you do not meet the repayment criteria for a mortgage.
Loan-to-value is based on the size of the loan divided by the price of the property, displayed as a percentage. Generally, a mortgage lender will always use the lowest price to determine the value of a property, so if you buy the property for less than it is worth the lower price will be used for the calculation.
This may be the same with bridging loans but you may also see Gross Development Value being used as guidance, which works out the value after renovations. This increases your borrowing rate even more, although the extra is usually only provided at different stages throughout the refurbishment/development process.
Virtually any type of property can be bought with a bridging loan, regardless of condition. They can be used to purchase commercial property, shops, land, flats, houses, units, shops, warehouses, hotels, restaurants, offices, holiday homes – just about anything in fact. If you already own a property, you can use that as additional security, which can make financing a portfolio of property easier (although if you live in the property you own this will be a regulated loan). If you already have loans against the property you wish to use as security, it is still possible to get a loan via a ‘second charge’ as long as the original lender agrees to it and there is enough equity left in the property to cover the cost of the loan.
Habitable means the property should have a working kitchen and bathroom, running water and a roof that just about keeps you dry. These are the very basics that mortgage lenders consider are necessary to live in a property, even if the property is dire need of refurbishment.
Mortgage lenders see uninhabitable properties as a risk. Should the project fall through and a borrower defaults on their loan, they have a property which they feel would be hard to resell and hence recoup the money they had lent. A loan will not be given on the potential of the property, regardless of the vision and plans of the borrower.
This can make it difficult to purchase these types of properties, but luckily bridging lenders can take a view on this. Many property investors use this type of funding to buy dilapidated properties cheaply, then renovate and repair them. If a borrower is using the loan to also cover renovation costs, it is probably best for them to over-estimate the total cost in case of unexpected problems or bills. Once the property has been made habitable it is usually possible to obtain a long term mortgage on the property, or sell the property on, to repay the loan.
Getting finance on land for property development can be complicated, as many lenders see it as a risk. Funding such as construction loans are available but these generally require proof of planning before finance is agreed. If you want to secure the land quickly, so you don’t miss out on the deal, apply for a bridging loan. Novellus considers each case individually but has in the past lent against land with and without planning. Refinancing on the purchase can then take the form of a development loan and then, in turn, a long traditional mortgage once the work is complete.
Property investors use auctions to find bargains and deals, so they can then develop the properties and sell them on at a profit. However, property auction purchases require an instant completion, with a deposit paid straight away and the remainder due generally within one month.
Properties sold at auction are advertised in catalogues which are distributed several weeks before the sale, giving interested parties time to view and research the property. Unlike traditional sales through estate agents, this is the only time available to decide whether you want the property or not. If you spot a property you are interested in before the auction date, you won’t have much time to secure funding.
The result of these two factors is that you need instant cash, as when you buy at auction it is an immediate purchase. Therefore, if you need finance quickly and you do not yet have a long term loan in place, bridging loans are a good solution. Novellus currently offer very competitive rates on auction purchases – please see our latest information by clicking here.
Bridging loans are a quick source of funding, but exactly how quick depends on the individual lender. Here at Novellus we can complete the process within days (and have been known to advance funds within 48 hours) as we are privately funded, so you can deal with a principal straight away. With no credit committee once the loan is approved we can send funds immediately. A normal time frame is two weeks, although it can take longer depending on the exact circumstances. If you need the cash quickly, speak to the lender or broker directly and find out what the quickest outcome is before you go ahead with the loan.
Lending criteria differs between lenders, depending on their niche or specialism, but in general, the following criteria are considered:
- Size of the loan – how much do you want to borrow? It is normally set at a minimum level of around £10,000 with a flexible upper limit but specifics depend on the lender. Novellus Limited can provide loans well in excess of £5m
- Term required – you can borrow for just one day if needed but the average loan is between 6-12 months. Although some lenders do provide longer terms than this.
- Security – you must have an asset to secure your loan against, which is generally a property but other high-value items such as stocks and shares, for example, will be considered. There must be sufficient equity in the property to pay off the loan should you default on the repayment.
- Type of property – as discussed earlier nearly any type of property can be acceptable, regardless of condition.
- Commercial or residential – either is acceptable.
- Age – 18+. The upper age limit will be dependent on individual lenders.
- Experience in property development – have you completed this type of work/investment before? Lenders look favourably on investors who know what they are doing, although this would not disqualify newcomers.
- Proof of income – unlike a mortgage this is not required but can be of assistance, as interest is not paid monthly but when the loan itself is paid.
- Exit route – many lenders like a plan in place that outlines how you intend to repay the loan. This could include long term finance, selling the property, money owed being cashed in, the maturity of policies etc.
In the main, as long as you have security to offset the loan your application should be approved.
There is not really an end figure on how much you can borrow on a bridging loan. Most lenders are flexible on how much they are prepared to lend, based on the value of the property you are buying or the value of the asset you put up as security. Anything between £10,000 and £1million is normal, although you can apply for more if needed.
One of the hardest aspects of a property investment business is getting started. When you have a portfolio in place, securing funds becomes easier, but in the beginning, it can be difficult to find the finance you need to take that first step. Bridging loans can be used at any step of the ladder but can be particularly helpful when you have not yet got your business/project off the ground.