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bridging finance Dec 10, 2017

THE QUESTION

At a recent property meet the subject of using an unencumbered property as security for Bridgers came up.  Is it true that you can get 100% finance by using the house you’re buying and your unencumbered house as security to get the deposit money and refurb costs from the bridging?

THE ANSWER

Yes, it is perfectly possible to achieve this using bridging finance.  In fact, I teach exactly how to do this under the Fast Funding Formula module in my Ninja Investor Programme workshops.

If you own an unencumbered property you can offer it as additional security to enable you to borrow 100% of the purchase price.  More than that, you can also borrow the refurb costs too.

Bridgers will lend you up to 75% of the value of your unencumbered property.

It is also possible when your current property in not unencumbered, but has a lot of equity in it, typically 50% plus and this is a more common situation.  Then bridgers will lend on a second charge basis.

Because second charge lending is riskier for a lender than having a first charge on a property, the loan-to-value drops to a maximum of 65%, but 65% of what?  Of the value of your property, not 65% of the equity in the property.  Take a simple example to illustrate this:

Property value £200,000

Mortgage £100,000

65% of £200,000 = £130,000

So bridgers would lend a maximum of £130,000 in this instance, but the first charge mortgage lender already has £100,000 of that so that leaves £30,000 of usable equity for the purpose of a deposit on a property you want to buy.

Why would you not just get a mortgage on your property?  Well, you could, but you might not want to for any of the following reasons

  • The rental income the property derived meant that mortgage lenders would lend you significantly less than 75%, more so since lending criteria in this respect tightened in January 2017.
  • You might have already cleared a mortgage on this property after many years of paying it down and feel quite attached to its unencumbered status. You would be prepared to bridge against it for a few months, but don’t want to get tied down with another mortgage for years to come
  • You might not be very active, so committing to a year-round monthly payment, although cheaper, is less favourable than a short-term loan, even with higher interest, when you have an ongoing project.
  • Your credit may not be good enough to get the best mortgage rates, but bridgers aren’t fussed by that.

If you are wanting to take a second charge against your main residence, your provable income required to get further borrowing from a mortgage or secured loan lenders may be insufficient, but bridgers don’t take your income into account

You should ensure that your project has sufficient profitability that you can repay the loan and return your property to its unencumbered state once the project is either sold or refinanced.

 

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