There are two different circumstances when 100% bridging finance is available to purchase a property.
The first is by using additional security, meaning loans over 100% of the purchase price are achievable.
The second is when buying a property below its market value, using a loan facility based on the open market value of the property and not the purchase price.
If you want to raise a bridging loan for 100% of the purchase price of a property, then this can be achieved by offering the lender additional security.
One bridging loan facility can use multiple properties as security in order to:
The additional security being offered can be one or more properties. Each property offered may require a valuation to be carried out, plus there will be increased legal fees for each additional property. Therefore, if you are in the position to choose from multiple properties, it maybe best to select the one that offers the most equity.
It doesn’t necessarily matter if the security property has an existing mortgage on it, depending what the value of the property is and how much is remaining on the mortgage.
When working out how much equity is available in a property for bridging loan purposes you can carry out the following sum:
If the property is worth £100,000 and there is a mortgage of £30,000 already on it, the current loan to value is 30%.
If you want to keep the overall loan to value to a maximum of 50%, then you can raise an additional £20,000 on this property.
£100,000 (property value) x 50% (LTV) = £50,000
Then take off the existing mortgage balance
£50,000 - £30,000 (mortgage balance) = £20,000
If the property you wish to purchase is £200,000 and you have £90,000 available to put in after paying stamp duty and other fees, you require a loan of £110,000.
However, if you wish to keep the loan to value at 50% or below, you could use another property as additional security in order to achieve this.
This is probably the most common example of using a bridging loan to purchase a property under its market value. When someone is selling their property to a family member or close friend, they may want to discount the purchase price for them, sometimes significantly.
Mortgage companies will usually base their lending on the lower purchase price figure, so if there is no deposit available they probably won’t be able to help. A bridging loan can possibly be used instead to purchase the property, then after 6 or 12 months, taking into consideration the 6 month rule, a mortgage facility is taken out based on the value of the property, because it is a remortgage and not a purchase.
You maybe a sitting tenant in a property and due to your situation agree a reduced purchase price with the owner.
You may have carried out work to a property, restoring a rundown property for example, and the owner is unable to pay you. Rather than take them to court you could possibly agree to buy the property off them for a reduced price, after all your work has increased its value.
You may have come to a previous arrangement. Typically, you agree with the owner of a property to purchase it for a certain price but have an arrangement that before you complete the purchase you are going to carry out some improvement works to it.
You see a property that needs repair, but rather than buying it then doing the improvement work, you agree a price, carry out the work then buy it for the previous agreed price.
House in need of repair with an asking price of £100k
You agree to buy it for £100k in a few months time, during which time you are going to carry out improvement work to the property.
You improve the property, spending £20k and raising its value to £150k.
With this example you can now buy the property for £100k but raise finance on it based on a value of £150k.
If you were to buy the property when you first seen it, and were able to raise a 75% facility, then you would have required 75% of £100,000 = £75,000
100k - 75k = £25,000 + £20,000 to carry out the works.
Therefore you would have required £45,000.
By coming to an agreement and then buying the property afterwards you have managed to do this by just using the £20,000 to carry out the work and then able to raise the full £100k purchase price.
£150,000 value x 75% = £112,500
Before entering into such agreements please consult a solicitor.
Before buying a property at auction it is advisable to have the property surveyed and valued. If using bridging finance to purchase the auction property, have your facility in place before hand, which will be based on the valuation report.
If you win the property for a price less than the value given to it on the valuation report, then you will be buying it under market value. Whether or not you will be able to raise 100% of the purchase price will depend on how much below market value your winning bid was.
For further information on buying at auction please see our Property Auctions Guide.
If the seller needs to complete quickly, they may be willing to accept a lower offer in order to achieve this. This could be because they have found another property that they don’t want to lose, or perhaps they need to relocate for work, or the sale is linked to dividing an estate between beneficiaries of a will.
Fees may be higher if you are using multiple properties as security for a 100% loan. This is because each asset will need its own valuation undertaken.
Also, if you default on the loan all of the assets that you have used as security will be at risk of repossession.
You need to be cautious if the reason that the property is being sold under market value is because the seller is in financial difficulties. It the seller subsequently is declared bankrupt in the next 2 years the Official Receiver can reverse any sales of assets below market value. The Lender may insist in you taking out indemnity insurance as a requirement of the loan in order to protect them against financial loss should a claim be made on the property by a Trustee in Bankruptcy. However, this type of insurance only covers the lender’s losses in this event and not your own, even though you may have to pay for the policy.
Last updated: 15 February 2019 | © KIS Finance 2018