How does a bridging loan work? I’m guessing you probably have a rough idea! But I do understand that knowing all of the financial intricacies and terminology can be daunting and sometimes wholly confusing! Don’t worry, I am going to explain everything, so you understand precisely ‘how does a bridging loan work’ but also the benefits, risks, and also how it can help you. Read on to find out more.
Understand your bridging finance options.
As independent mortgage brokers who help people like you with bridging loans (we also do lots more too).
Part of our job is not only helping you understand precisely how a bridging loan works, but also what you are getting yourself into.
You might think it is the best solution for you, but a good adviser will help you decide if it is the right thing and whether there are alternative options available to you. Don’t forget that an experienced independent mortgage broker will have worked with lots of people like you and may know of options that you might not have considered!
Importantly, they the adviser asses whether it is the best solution for you.
Please don’t get me wrong bridging loans are fantastic for certain things, but sometimes there are also better alternatives.
How does a bridging loan work?
As I said, we often get asked by clients who need bridging finance, “how does a bridging loan work”?
They have an idea what it is, but sometimes don’t fully understand it.
To help them and you, the answer is quite simple.
A bridging loan is no different from a standard mortgage on your home. It’s just a little different!
How is a bridging loan different to a standard mortgage?
A regular mortgage (like the one on your home) is (usually) set up for a relatively long time in the beginning. For example, it is common for people to get a mortgage for 25, 30 or even 35 years.
A bridging loan, on the other hand, usually is for 12 months. It can be slightly longer, but the core difference is that it is a short term ‘mortgage’.
With a ‘normal’ mortgage, there are monthly payments.
With a bridging loan, it’s common to have no monthly payments!
Instead, it’s possible to make the ‘payments’ in one go at the end along with the original amount borrowed. This is technically called ‘rolled-up interest’.
With a regular mortgage on your home, it is common to get a ‘special rate’ initially, which might be a two year fixed rate, for example. You will still have the mortgage for the whole term (i.e. 25 years). Yet, at the end of the ‘special rate,’ the mortgage reverts to the lender’s variable rate (known as the standard variable rate) which can change at any time, and it’s usually more expensive than the ‘special rate’.
A bridging loan, on the other hand, is much simpler. You have the rate, and that’s it.
A bridging loan will usually have no penalties to pay it off early (make sure you always check the small print). Whereas a ‘normal’ mortgage may have penalties. However, this will usually only apply if it is within the ‘special rate’.
How can a bridging loan help me?
With the changes in the tax rules, lending criteria, regulation for landlords, and flat house price growth (depending on the location), it has been a tough period for the regular investor.
Which is why so many ‘amateur’ landlords (and some experienced ones) are selling. They are either getting rid of their portfolio entirely or making it smaller.
In the past, people made easy money in property without having to do anything.
Not because they were talented, but because the market was doing it for them and rising.
These investors didn’t care about what rent they would get or how they would pay off the mortgage. They were all playing for capital appreciation; in other words, growth!
The good news is for serious investors who are left; there is a big opportunity.
However, what we are seeing is that investors who may have focused on one aspect of property investing, now have to consider other ways to maximise their returns.
Interestingly, we are seeing more mainstream investors start to consider refurbishment as a way to add value to their investments.
Changes to the mortgage market & much more!
Since 2008/2009 the market has changed significantly. Property prices have not gone berserk.
There have been tighter mortgage lending rules and more recently, the anti-landlord movement which has seen substantial tax changes among other things!
Casual investors have either sold and left this sector or will do so.
They aren’t getting capital appreciation like they once did and so it’s harder to find the returns that once existed. It’s harder to make rental income alone stack up.
Of course, that’s not to say there aren’t still tremendous opportunities.
The difference is you’ve got to work much harder for it.
You’ve got to be committed to being in the ‘property game’.
What now for property investors?
Investors now need to consider how to maximise an asset, whether that is their existing property portfolio or when looking at new opportunities.
They need to look at different types of property asset classes from residential buy to let, HMO properties, holiday lets, commercial, semi-commercial, industrial units, and property development.
So if you are starting in this world, don’t worry. There are more opportunities because of this.
It does mean you have to consider more options and maybe look for undervalued properties or properties at auction and if you do, then using bridging loans will likely form part of your strategy to finance the opportunities.