How To Use Bridging Finance To Buy an Investment Property

welcome back to another video everybody my name is Leah and I'm a and if you are new here then we make videos all about property business and working together as a couple in one of our last videos how much this investment property pays us per month we'll link that up in the cards we got so many comments asking us how the finance part of the deal worked specifically bridging loans so in this video we're going to cover what bridging loans are how they can be used to purchase investment properties and what the costs are and how you repay them we going to be showing you some real life examples of bridging loan paperwork that we have done ourselves Leah is very good at this type of thing um hi basically because uh I didn't want to do it so Leah basically does it all I'm head of paperwork at property couple and before we go into the details if you haven't already please check out our brand new website property couple. co.uk where you can sign up to our newsletter for more advice and tips on property [Music] investing so there's a few different ways you can use bridging you can use bridging Finance for a residential home purchase you can use it to buy auction properties you can use it for what we've done which is like buet properties HMO conversions you can use it for big developments commercial property and even for tax bridging if you need some help paying your tax bill however today we're going to be focusing specifically on the B toet bridging loans and how they can help you invest in property so like most of us imagine that you need some cash and you need it fast always this could be anything from like 50k or less to 25 million there's bridging companies that will lend you loads so essentially what bridging is it's a short-term loan where you borrow the money use it to do what you need to do and then you pay it off very quickly I actually met a broker the other day not that long ago and he was like yeah we do bridging loans but the minimum they lend is like 5 million and I was like okay maybe come back to you yeah one day maybe we'll see they are essentially like a fin Financial boost with a repayment period as short as a week or as long as say 2 years and I might add as well that they always want to know what you're using the money for you can't just contact a bridging loan company and say I just need a bit more money right now with no plan they want to know how they getting that money back I remember the first time that we actually heard about bridging loans and we were sat in a classroom in 2019 learning about property 2018 no it was 2019 18 19 18 18 19 18 who cares but we were sat in a classroom basically right learning about this stuff and they were talking about bridging loans when they sort of explained what they were my first gut instinct was like ooh like I don't know about those I'm sort of a bit scared like expensive lending short-term lending doesn't sit well with me but once we understood how you could potentially leverage them to enhance your life and build a property portfolio then my mindset or our mindset definitely changed on that so these loans are backed by something valuable like you own so for example your home the equity in your home your wife yeah or you know the bricks and morar in the property that you're that you're going to purchase and interest on these loans is calculated monthly we're going to show you some examples of that and here's a cool tip the sooner you pay off the loan the less interest you'll owe so if you take a 12-month bridge and you complete the project in 6 months you will obviously only pay the 6 months of Interest the reason we add that in is because often all all of the interest is deducted up front and then you get it back in a reimbursement at the very end of the project we've been in a position where we've done that but we've also been in a position where a project has gone on longer than what it should have and you know we got to 9 months and you know we obviously got less of that interest back so it's all about understanding the numbers understanding potentially where things could go wrong and obviously making sure that you've got a contingency in place to account for that so let's just quickly touch on how and why you would use a bridging loan we now look at bridging as almost our trump card when we're looking to buy bellet Properties or even if we were looking to buy a whole portfolio for example we're currently working with a trusted sourcing agent who has an eight property portfolio for sale and where a bridge could come in very useful to buy the whole thing here's the cool part you can use the equity in your home or in an existing balet property or the property that you are going to purchase as collateral for that loan so that essentially means that your assets help secure the deal and the best thing about bridging loan is that they are really really fast so they're quick to arrange sometimes you can get illustrations and approvals within days yeah so ultimately bridging can allow you to get into a deal very quickly so you can renovate it and let the property out so that you can start producing an income as efficiently as possible or of course if you just want to do a quick flip and you know you're going to be in and out in 12 months then you can use bridging to get in and then the sale of the property can pay off the bridge so what did bridging loans cost most of the time in fact I say most of the time every single time work with a trusted broker as they are the specialist in this type of products and Brokers will charge a fee that cover a bunch of stuff like searching for the best rates getting quotes securing a loan decision in principle often known as a dip and even if you decide to cancel a loan that's already agreed upon they will sort all that out for you as well so as AK said all of the bridging we've done has been through a broker and we have paid the fees for that you're about to see some of the expensive fees we have paid for bridging let's just bring up some examples here of bridging that we've done so I'm just going to bring one up this bridge was actually with lend invest very popular lender and it's March 2021 so you will have to obviously bear in mind that fees might be a little bit more expensive now as you can see in this breakdown we were looking to borrow £ 82,500 from this bridge and the mortgage term here is 12 months so even though we're calling it a bridging Loan in the eyes of a solicitor the eyes of an estate agent it is a mortgage you are using a mortgage although lots of investors like like to say I'm I'm paying cash because maybe bridging is seen as quick cash so you can play that however you want to play it when you're talking to estate agents but it is a mortgage let's be real so the interest rate that we borrowed that 82,500 was 0.8% now that's per month so if you do 0.8% times 82,500 you'll get 660 and you can see that there the monthly payment for borrowing this money is £660 per month seems doable like based on our income at time we're like yeah £660 per month but here is the catch 12 months of that is deducted up front so £ 660 * 12 is 7,920 to be specific that is deducted off of the 82,500 so we don't actually ever see the full 82,500 because they take their full lot of interest up front apart at the beginning felt so done over I felt so done over hang on a minute like they're taking all of that but I think that's where it's key to really understand that point that you make it's really important and make sure that you you still have enough funds there to be able to do the deal for sure and the deal is is that if you are in and out of this mortgage within the 12 months any of the 660 a month you didn't used gets credited back to you via your solicitor when you do get your Redemption fee at the end what I want to talk about here is this minimum interest charge that you see 1,980 so if you do 1,980 and you divide it by 660 which is the monthly cost you get three so what that means is that they're not willing to do the deal with us for Less Than 3 months of interest it's like not worth their time to make less than 1,980 fair play and then underneath it says number of months retained 12 which we've already gone into and then it it literally says in a sentence here if you take advantage of the maximum term of your loan the full year you will need to repay the mortgage in full on and then it's one year from that date 25th of February 2022 that's the deal that's what you're doing I can show you me many other pieces of paperwork as well with different amounts and different interest rates this is the Crux of it this is what you get I think as well something to take note of and something we were taught is actually working with the lender in a way so when the project is happening you kind of keep them updated I think when you show willingness to kind of work with the lender as well they want to make sure they kind of look after you as well so we had one project which was overrunning quite significantly a couple of years ago and I was in contact with the lender quite a bit just updating them saying we broker and just really just communicating cuz ultimately they're not sort of trying to catch you out you know they kind of want their money but they want to work with you and make sure that any problems can be kind of flexed if needed to be so I think that's just something to to note as well that's so true if you've got that good relationship as well with the broker and the broker's got a good relationship with the lender then you can say I'm I need an extra month I need an extra few months or just a buffer they might carry on at the same interest rate of the 660 a month you know they can be really flexible I've just brought brought up another one here and you can see that on this one you can't actually see the name of the lender you can just see the name of the finance company that we used which was Enterprise Finance at the time here's another thing sometimes when you're working with a broker they don't want to tell you the name of the lender they don't want to tell you it's with lend invest or whoever it's with my point being that you can't go call up the lender directly and see if you can negotiate a better fee and cut out the broker they don't want you to do that and that's not really the done thing no but I I think there's massive Merit in having a broker as well this is about using Specialists to get the right product and you know help you make sure that you do things correctly for sure so on that here's some of the costs that it does actually uh involve I've just opened up another quote from uh a bridge for 87,000 so underneath the 12 months of retained interest it says here lender solicitors fee so that's TBC that's going to be deducted from the loan you have to pay the solicitor's fee for the lender I know that's crazy that's just one of the things Title Insurance £395 that's basically making sure that the insurance document says the lender's name as an interested party administration fee £1,995 these are where it gets a bit crazy a lenders Arrangement fee here of 1,740 and then it says underneath your approximate net loan amount so that's actually the money you're going to receive after the deductions of the 12 months interest can I just say as well like at the beginning I was kind of struggling with all these fees but after a little bit of experience and stuff it's just the cost of the money they have something we don't have 86 Grand yeah which is 86 Grand and so if you want that here are the terms this is just part and parcel of property investing and just a cost of borrowing that money and like of course there might be some negotiation I remember that once we'd used the same broker quite a few times we said you know about your Arrangement fee is that is there any way we can work on that a little bit you know can you lower it and they did but it's all about conversation I think the lenders Arrangement fee will always be different you know the broker's Arrangement fee my current broker who I use actually is very very reasonable now so it takes a little bit of time to find you know someone that I think works well one more thing I would like to mention is the broker's Commission on one of the mortgages we did with together Finance the broker took their commission from the lender we were not involved in that uh 1,640 is the broker's commission and it said that this is a payment we will make to the broker directly and it will not be added to the loan so that basically means you don't owe 1,640 we're going to be making that payment to them but they put it out there so you can see what your broker's making which I think is quite nice yeah it's interesting cuz like different products and different lenders and there isn't sort of like a one- siiz fits all every deal shows me something different like for instance this one goes Title Insurance 100 quid and then you go well why was it 300 the other one like it's hard to argue with if you want the money you've got to go through the fees so those those are the examples I hope that you found those screenshots useful because they're all based on real life bridging loans that we've done so I think one of the big questions then becomes how do you repay a bridging loan we talk about you know being able to use a bridging loan to purchase an investment property and start to leverage borrowed money to make US money how do we then go and pay that back before you've even borrowed the money they will ask you in your bridging application which you have to fill in there's loads of paperwork they'll say how do you plan on paying this back if it's a tick boox sometimes the tick boxes will say sale of property one box might say remortgage and one box might say other you have to tell them how you're going to pay it back every single time we have used bridging we have used a refinance to pay off the bridge so what that means is once the project is done we get a value out to our property to look at our shiny new property and say it's now worth this we then get a new mortgage a bu toet 25e mortgage for that amount for 75% of that amount and that money pays off the the bridge that money doesn't ever land into our account it's all done through the solicitors and if there's any left over we receive it at the end you might have heard of the term b r buy renovate rent and refinance and essentially that is that model so to demonstrate this in a super super simple way and I caveat here guys that these numbers are just an example to explain how it can work but imagine you buy a property for 100,000 you have £25,000 as a deposit and you bridge the rest of the purchase that's £75,000 in order for you to buy this particular property now you are now the lucky owner of this property you just kind of want to give it a bit of love and renovate it slightly so let's say you spend £20,000 it's now a beautiful home to a lovely family who rent it out now in order to pay off the £75,000 bridge that we owe on this property we go back to our broker and we tell her that we are ready to remortgage the house and we ask her to find us the best bolet product on the market so once we are happy and we have the product locked in the lender sends a value out to Value the property on the market because we've brought it from this rundown property and we've kind of added some value to it the property is now worth £150,000 so we take out a 75% loan to value mortgage on the new £ 150,000 value so this means that the lender issues us a new mortgage for £105,000 so we then use this money to pay off the £75,000 bridge that we used to buy it so that leaves3 ,000 left and that comes into your account and you can then use that to invest into another deal so just to summarize here are just a few pros and cons of bridging Finance one of the major sort of Pros here is flexibility they enable you to buy Investments without having all the funds necessarily in your account and if you have the right broker you can do this very quickly as well and the other main Pro that we like to say about is that there are no monthly repayments like they would be on a normal mortgage you work out the numbers so that you have enough funds to do the deal when the lender wraps up their interest rate at the beginning in one lumpsum fee of 12 months of Interest obviously we've said you do get that back any interest you don't use it just kind of helps you understand sort of where you're at so that payments just feel a little bit easier don't they but there is a risk where you really need to understand what you are doing so that you can pay back the full loan at the end of the term otherwise there can be some very serious consequences for not paying back the mortgage on time it's it's a 12month shortterm mortgage some of the main things to watch out for with bridging there's risk associated to it because you really need to understand what you're doing in order to be able to pay that loan back as Leah said quite a few times it is short-term lending and there are some serious consequences for not paying the loan back on time and often there will be personal guarantees if youve taking the loan out in your company name you will be personally liable to pay it back such a good point so just be prepared for that if you are in a position where you can't pay and then another one of the cons is it is higher interest rates because this is fast and quick Lending the interest rate is going to be higher than what it would be for a normal a regular mortgage but you're locked in for for say 25 30 years but if you're doing this correctly and you're using bridging to Advantage and you've done your numbers then it's an amazing tool to have in your toolbox loads of investors don't even know bridging exists or or use it I just think if you know about it and you know what you're doing then it's perfect to use if you do need any help with this kind of thing you can check out our website where we're going to be sharing more tips and tricks about property investing and that we've used to help us get where we are now and we've also got mentoring with AK if you want to check out our website and fill in a mentorship form he can help you as well handhold you through a deal we hope you really liked this video and you got tons of value from it if you did please remember to hit that subscribe button and we will see you in the next one take care bye [Music] bye [Music] n

Channel: Property Couple

Views: 10,395

Keywords: uk property, uk real estate, uk property investor, how to start investing in property, buy to let, HMO, hmo conversion, property investing, UK real estate, wealth building, property investment tips, real estate entrepreneurship, financial success, property portfolio growth, financial freedom, UK property market, property investment strategies, entrepreneurial journey, real estate partnerships, business and life balance, personal finance UK, property, bridging, bridging finance

Id: fODLX-qY5Yg

Length: 17min 9sec (1029 seconds)

Published: Sun Mar 03 2024