How bridging supports property auction purchases
By Scott Marshall, managing director at Roma Finance
With increases in house prices in recent years, acquiring investment property has become a competitive market. After all, it’s vital that the property is bought at the right price, as this can affect future yields the landlord can achieve.
Property auctions are a good place to source a variety of property types as they often offer properties that aren’t offered through the usual channels. Prices can be very favourable too, as works may need to be done to the property. Once the hammer falls, you own the property, so there are no delays in adding to the portfolio.
However, because things happen quickly, the buyer often only has 28 days to complete the purchase. To reap the rewards of buying at auction, buyers need access to quick finance. Traditional lenders are often unable to meet the short auction timescales and may also have strict criteria, which means they may not lend at all on property that needs refurbishment – particularly if the property in question doesn’t have functional amenities, such as a working bathroom or kitchen – or the borrower is self-employed or perhaps has had credit issues in the past.
That’s where specialist lenders can help with bridging finance. Typically, a loan is for three to 12 months, during which time the borrower can refurbish and prepare the property for rent or sale, and look for longer-term finance, such as a buy-to-let or a commercial mortgage, depending on the property type. Like a mortgage, a bridging loan is secured on property – either the one bought or another the buyer owns.
Bridging loans are flexible in their use and it’s not just buy-to-let property they can be used for. Retail outlets, semi-commercial property, warehouses, offices and industrial units can all be financed using bridging loans.
However, with recent changes in buy-to-let taxation and legislation, many landlords are looking to houses in multiple occupation due to the potential of higher rental yields. Landlords have clearly been doing their sums to make sure they are operating a profitable portfolio capable of securing future growth too.
Remember also that with bridging finance, at the end of the agreed term, the balance of the outstanding loan – plus accrued interest – needs to be repaid in full. This is called the exit. It’s important that the lender and the borrower know how the lump sum will be paid off from the outset.
It’s been an interesting time in the bridging finance sector as the last 12 months have seen the market adapt to change, but lenders have adapted and continued to deliver new products and improved service levels for borrowers – whatever type of asset class they are buying.