The Association of Short Term Lenders (ASTL) reported a 92 percent increase since the same quarter in 2013, when it surveyed its members. Benson Hersch, its CEO, estimates that this figure currently equates to £3billion of completions each year.
So what does this trend mean for property landlords? Are bridging loans a ‘lubricant to the wheels of the housing market,” the best case scenario asserted by the Council of Mortgage Lenders, or a fast route to financial ruin?
Here’s bridging loans for landlords summed up in eight quick questions.
Who can get a bridging loan?
Bridging loans can be sources of finance for both established and new landlords. Anyone who is financially stable and has security available – which does not have to be in the form of property – will be considered. Boats, classic cars and art are all examples of possessions that can be used to secure a bridging loan. Bridging finance can be taken out for up to 70 percent of purchase price. Staged release of further finance may be possible once improvements have been made to a property. But before any money is released, a lender or broker will want to see that you have a viable exit strategy in place. Be aware that when mortgaging a property you have purchased with a bridging loan, it will be considered as a remortgage. Some lenders will not remortgage within six months of purchase.
What interest rates will you pay?
The average interest rate on a bridging loan is around 1.25 percent a month, which equates to an annual interest rate of about 15 percent. The larger the loan, the smaller the interest rate you will be offered. However, unlike with mortgages, bridging finance interest rates are not set in stone, so there may be room for negotiation. On a large loan amount with a large lender, it may even be possible to achieve a rate as low as 8-9 percent per annum. Landlords also need to be aware of arrangement fees, which can add a further two percent of the loan amount.
Can a bridging loan release quick cash?
In the right circumstances, a bridging loan on a property can be acquired within 24 hours, although 5-7 days is more usual. If you are willing to pay the higher interest rates short term, this can put a landlord in a strong position and edge out buyers waiting on mortgage finance, says Matthew Naylor, mortgage & protection consultant with whole of market broker Ascot Bridging Finance www.ascotbridgingfinance.co.uk . Once your mortgage comes through, you can settle up the bridging loan and reconcile your debt at a more sustainable rate.
What is the role of bridging finance at a property auction?
Unless you’re teetering on a giant pile of cash, then taking out a bridging loan may be your only route to success at property auctions. Auction buyers are given 28 days to complete and if these terms are not met, then you will forfeit your 10 percent deposit and lose the property. It is possible to obtain mortgage finance within 28 days, but it will be a rollercoaster ride.
What’s the difference between open and closed bridging loans?
From your wallet’s point of view, the major difference between a closed and an open bridging loan is the interest rate you will pay. The rate is lower for a closed bridging loan, for which you agree a predetermined end date and is available only once contracts have been exchanged. As this arrangement presents a lower risk, lenders offer more preferable rates. If you pay off the loan early, most lenders will refund and interest you have overpaid. An open bridge has no set end date and can be negotiated for terms of up to two years. Longer term lenders include Dragonfly and Bridgebank. An open bridging loan can provide a welcome solution to a speedy property purchase, but is not to be seen as an alternative to mortgage finance, warns Naylor.
Can bridging finance help me buy an unmortgageable property?
A bridging loan may allow you to purchasing some of the kinds of investment property that mortgage lenders won’t touch. Whilst something as simple as no working kitchen or bathroom can make a property unmortgageable, a bridging lender may be able to offer the initial finance to get your refurbishment project off the ground. Once the property is considered fit for purpose, you can remortgage at a lower rate.
How do I apply for a bridging loan?
Some lenders only deal through bridging loan brokers, whilst you can approach the majority direct. The benefit of borrowing via a broker is speed. A bridging finance broker will be able to judge from your circumstances which lenders are the most likely to release funds the fastest. As bridging finance tends to be used in situations where every hour counts, a landlord could risk missing out on an important deal by approaching the wrong lender and facing rejection.
Who regulates the industry?
Bridging finance is an unregulated industry, but lenders tend to be pretty well behaved, admits Naylor. “A lender’s attitude to risk certainly changes when it’s their own money at stake,” he says. You will always be expected to furnish a lender with a convincing exit strategy. Some lenders have signed up to one of more industry bodies, whose members agree to a code of conduct. These include the Association of Short Term Lenders (ASTL), Association of Bridging Professionals (AOBP) and the National Association of Commercial Finance Brokers (NACFB).
Article Courtesy of: http://www.ascotmortgages.co.uk/first-time-buyers