Hello Readers,

Something that all property investors will know well is the importance of having a good, strong financial plan in place.

This may be simply financing your investments through cash, or a straightforward buy-to-let mortgage, however depending on the situation there’s a range of other routes that investors may choose to go down.

Following on from my article looking at the capital stack model, one of the most common types of funding is bridging finance. Seasoned investors will generally know about bridging finance in detail, however even they can all too easily fall foul of some pitfalls hidden within this common type of funding.

Before looking at some of the pitfalls, it’s probably helpful to outline what bridging finance is and when an investor may utilise it.

What Is Bridging Finance?

Bridging finance is an unregulated type of lending, more flexible than a mortgage and secured against an asset (or assets).

Bridging finance tends to be relatively short-term (12-18 months) and has a high-interest rate than a mortgage. This is generally because of the flexibility offered.

A bridging loan will need to be repaid in full at the end of the term and this is often achieved by releasing equity by obtaining a mortgage.

A bridging finance broker will be able to talk through all the funding options available, however, there tend to be four main types of bridging finance. Either a straightforward bridge that covers a gap, development finance (typically based on an end GDV and released in stages), a bridge to let that will roll onto a buy-to-let mortgage or a bridge to finish (where a developer may have encountered a problem and require additional funding).

Requirements, maximum LTVs and differing rates will apply depending on each individual situation.

When Might An Investor Opt For Bridging Finance?

There are generally two main scenarios where an investor may choose to utilise bridging finance.

The first is when purchasing a property at auction. It may be that the property is not mortgageable, or simply to enable a quick completion whilst a mortgage can be obtained.

The second is where a property is not mortgageable due to significant work needing to be carried out. Whilst this may be following an auction purchase it could, for example, be where significant structural development work is required (perhaps to convert into an HMO).

You will see how bridging finance is an excellent, flexible option for investors and developers, however there are some common pitfalls that investors need to be aware of. Here and four points to keep front of mind.

1. Beware of hidden fees:

• Arrangement fees quoted as per annum percentage
• Unclear penalty & default rates
• Exit fees as a percentage of GDV (ie: larger than they may seem)
• Loan management fees (ie: what the lender should be doing)
• Penalty fees on top of penalty interest
• Whole facility rate charges (when not drawn)
• Margins taken on professional fees
• A long list of adhoc fees (setup, admin etc)

2. Consider how there are more risks: If you don’t sell (or complete development work) as quickly as you planned, the loan could go onto the default rate

3. It may be hard to budget: As bridging finance interest rates can be variable; it may be difficult to budget accurately

4. Bridging finance is unregulated: This means that borrowers have no recourse to the protection of the FCA and is a big reason to do your research properly before committing to a particular product

Hopefully this article has been helpful in outlining how helpful bridging finance can be, but that it should also be well planned with a solid exit strategy in place.

If you are looking to either get started in property or expand your portfolio into the Medway area, then I will be more than happy to help. As usual, just drop a message on LinkedIn and I will be in touch!

Hasan