Experts are urging people to think longer-term
Property investors are being urged to think about how they will get out of bridging finance before they get into it, as a poorly planned exit can turn an otherwise good property deal into an expensive headache. Bridging loans are designed as short-term finance and can be particularly useful when investors need to move quickly, buy at auction, renovate a property or purchase something that does not initially qualify for a conventional mortgage.
Hannah Vandervennin, director and mortgage adviser at The Mortgage Consultancy, said investors should not be frightened of bridging finance. But they should consider the entire transaction from the outset, rather than simply focusing on getting the money as quickly or cheaply as possible.
She said: “Bridging has sometimes got a reputation for being expensive or scary, but used properly it can be an incredibly powerful tool. We use it to help clients buy at auction, fund works, move quickly on opportunities, break chains and solve situations that conventional mortgages simply can’t. The key is understanding the whole transaction before you start and working with people who understand both the bridge and what comes afterwards.”
Hannah said one of the biggest mistakes investors could make was assuming there was only one way of structuring a deal. She recently reviewed a case where a client needed to raise around £50,000, but the existing structure involved significantly more borrowing across two properties.
She said: “When we looked at the wider circumstances, there appeared to be another route using a smaller second-charge bridge against one property, which would have carried materially lower costs. That’s why the structure matters as much as the rate. With bridging, you need to understand exactly what you are trying to achieve, what security is available, how much you genuinely need to borrow and what happens at the other end.”
The exit from a bridge could involve selling the property or refinancing on to longer-term finance once renovation or development work has been completed. However, even a carefully considered property project can encounter unexpected problems, which is why Hannah recommends having more than one potential exit.
She recalled working with an investor converting a property into a house in multiple occupation (HMO). The borrower expected the completed property to achieve a particular valuation, which would allow them to refinance and repay the bridging loan. But the eventual valuation was significantly lower than expected, making the original exit strategy much harder to achieve.
Hannah said: “Nobody necessarily did anything wrong. The valuation simply came in differently from what had been expected and that’s exactly why you need a Plan A, Plan B and ideally a Plan C.
“If you’re relying on refinancing, you need to ask what happens if the valuation comes in lower. What happens if the works cost more than expected? What happens if lending criteria or the mortgage market change while you’re doing the project? You want to have those conversations before taking the bridge, not when you’re already on short-term finance and suddenly discovering your planned exit doesn’t work.”
The Mortgage Consultancy therefore looks at both the initial bridging finance and what is likely to happen afterwards when advising investors.
Hannah added: “A well-planned bridge should give you options and help you move forward. If the structure, numbers and exit have all been properly thought through, there’s no reason investors should be frightened of it.
“The mistake isn’t using bridging finance. It’s going into it without properly understanding the whole journey.
“Getting the money is only the beginning. The important question is where the bridge is taking you and how you’re going to get there.”
