Bridging Refinance

The flexibility and speed of bridging finance makes it ideally-suited to refinancing existing loan products, and helps real estate owners maximise earnings

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Flexible refinance options are indispensable for property owners and investors in real estate. A large part of the property development sector is focused on the “Buy-Refurbish-Refinance” model, which is very popular amongst professional and private developers - however, this model has been heavily restricted in the wake of the mid-2000s financial crisis, and investors must now find ways to source finance that is both flexible and dependable.

Bridging finance is an exceptionally flexible tool which may be used in almost any scenario. Bridging loans may be put to use to “bridge the gap” when long-term financial solutions are not available; they are commonly used in the real estate sector as a short-term alternative to mortgages. Like mortgages, bridging loans are high-value loans typically secured on property, but they are a much faster and more adaptable form of loan. By using bridging finance to release equity from a building, property developers and landlords can quickly expand their portfolios without falling foul of the tight restrictions within the property market.

Bridging loans are a specialised form of finance, and before committing to this type of loan borrowers should make sure they fully understand the liabilities involved; anyone considering a bridging loan should consult a financial advisor before proceeding.

When is Bridging Refinance Needed?

Bridging finance is needed in the real estate market because of the “6-month rule” that’s often applied to mortgages. Generally speaking, mortgage lenders are wary of offering a loan on a property that’s changed hands in the last 6 months, because some of these homes have been bought under-value. Buying a cheap house, refurbishing it and then either selling it or letting it out has been a full-time job for many individuals throughout the UK, and as a form of investment, it has been very popular over the years. However, unscrupulous buyers found a way to bend the rules of mortgage lenders for their own benefit, which led to over-exposure and the eventual collapse of the mortgage market.

Throughout the 90s and early 00s, the real estate market was only going up, year on year. This made property such a safe bet that many banks would happily agree to a 100% LTV loan, or a 90% buy-to-let mortgage; even if they were potentially exposed to default, the increased value of the property would more than compensate their initial loan. Banks could lend 100% of the purchase price for a £100,000 property, safe in the knowledge that if the borrower failed to repay they could sell the home at a profit easily enough.

Unscrupulous buyers saw an opportunity here, though, and exploited it to their advantage. A buyer might purchase a property under-value at an auction, and pay for it in cash; let’s say it cost them £100,000 to do so. The next day, they would call in a friendly valuation expert to value the property at a higher price, at £150,000, for example. They would then contact a mortgage provider and ask for a 90% LTV mortgage of £135,000, which the mortgage lender would duly provide; from their point of view, the house is worth £150,000 and the owner still retains 10% equity, so there’s no problem. However, it doesn’t take a genius to see that the sums don’t add up; the buyer has only put in £100,000, but has been given £135,000 by the bank. Even if they make no mortgage payments and lose the property (and their 10% equity of £15,000), they’re still making £20,000, so there’s no incentive whatsoever for them to make repayments on the loan - they’ve made a 20% return on investment without refurbishing or selling the property.

Because of these so-called “back to back” loans, mortgage lenders introduced their 6 month rule in the wake of the financial crisis to protect themselves from opportunistic refinancing. However, this has the unwanted effect of penalising legitimate buyers who want to quickly refurbish a property and sell it on - they won’t want to retain a house for 6 months (paying off a mortgage or short-term loan the entire time).

Bridging for Property Refinance

When buyers purchase a property to refurbish, they typically do so with a cash payment. This allows them to quickly close a purchase, which is necessary for many forced sales and auctions, but it means that buyers are heavily committed to a property. Instead of tying up their money in 100% of a property, many refurbishers would prefer to move on as quickly as possible by releasing their capital - this is typically achieved with a bridging loan.

For example, a buyer might have the opportunity to purchase a home for £65,000 in cash. They may then spend another £10,000 on renovations and end up with a property worth £85,000 - their goal is then to acquire a mortgage for the most part of the property’s value, which frees up capital to invest in other properties. The days of 90% buy-to-let loans are gone, but some lenders will still offer up to 75% LTV mortgages for these properties, which means the property owners could expect to release £63,750 from their investment (whilst still retaining 25% of equity in the property). However, they would have to wait 6 months to do so, which is often a death sentence in the real estate sector.

Instead, property owners can turn to bridging lending, where small and specialised teams of financial experts will work to create a bespoke lending solution to suit their client’s needs. Bridging finance is typically available much sooner than mortgages are, and bridging lenders will be able to provide much-needed capital for investment elsewhere. After securing a bridging loan, the property owners will typically seek to refinance once again with a mortgage provider as soon as possible, as this long-term solution is more affordable.

In the world of real estate, bridging finance is a crucial element for the success of property developers. The flexibility, speed and professional attitude of bridging financiers make it a powerful tool for property buyers and enables healthy expansion and growth across the industry.

Common Uses Of Bridging Finance

  • Overview

    Bridging loans are short-term financial solutions which are typically found in real estate and a common use is to purchase a property before a mortgage can be put in place.

  • 1st Charge Bridging Loans

    Bridging loans are a flexible form of finance that can be put to many uses; in this article we discuss the application of 1st charge bridging loans and finance

  • 2nd Charge Bridging Loans

    Bridging loans are a highly flexible form of finance, and we discuss why the ability to secure a 2nd charge on a single asset can be invaluable for borrowers

  • Bridging Refinance

    The flexibility and speed of bridging finance makes it ideally-suited to refinancing existing loan products, and helps real estate owners maximise earnings

  • Buying Before Selling

    Buying before selling enables homeowners to break free of their property chains, and can often be achieved with the help of bridging finance.

  • Chain Breaking Finance

    Breaking free of the property chain is crucial for many buyers, and bridging finance is often an ideal way to jump-start a property purchase

  • Discounted Purchase Finance

    Bridging loans can be used to enable the purchase of property at a discounted price, where speed and flexibility makes them an ideal choice for property developers

  • Divorce Finance

    Though it is never pretty, divorce is sometimes simply a fact of life. Bridging finance helps divorces resolve quickly and smoothly with the minimum disruption.

  • Fast Property Purchase

    Completing a property purchase quickly can be highly valuable to many buyers, and bridging loans can offer the ideal solution for a quick purchase

  • Freehold & Lease Extension Bridging

    Purchasing a lease extension or freehold to maintain property’s value is often the right choice for owners, and bridging loans enable fast leasehold extensions

  • High Value Property Bridging

    High value property is a highly competitive sector of the UK real estate market, and requires specialist bridging lenders to provide bespoke financial solutions

  • Hotel Finance

    Bridging loans are an excellent form of finance well-suited to the needs of hotels and hoteliers, and flexible funding solutions can be sought for many requirements

  • Inheritance Tax

    The UK Inheritance Tax is a significant bill for an estate’s executors. Meeting this quickly and easily is a task that bridging finance is ideally suited for.

  • Non-Status Bridging Loans

    Non-status bridging loans enable investors to develop their portfolios without the restrictions of affordability assessments, and are a powerful form of lending

  • Personal Bridging Loans

    Personal bridging loans are one of the most flexible financial products there are, and bridging lenders are able to meet the varying needs of their clients.

  • Property Downsizing

    Downsizing can be a smart move for many property owners, and a stable form of finance such as a bridging loan is needed to provide flexibility and security

  • Quick Purchase Bridging Finance

    Moving quickly can often be make-or-break for a deal, and it’s important that professionals are able to access fast-moving sources of finance.

  • Regulated Bridging

    High value property is a highly competitive sector of the UK real estate market, and requires specialist bridging lenders to provide bespoke financial solutions

  • VAT Bridging Finance

    VAT bills add a hefty charge on to property purchases, and developers must use VAT bridging loans in order to minimise their impact on a project’s profitability

National Association of Commercial Finance Brokers Financial Services Authority Association of Short Term Lenders Association of Bridging Professionals is brought to you in partnership between FMG and Falbros.

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