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One of the strategies that has gained popularity in recent years is buying properties below their true market value (BMV) and using bridging loans to finance the purchase and renovation.

But what are below market value bridging loans and why are they so attractive to property professionals? In this article, we will explain the concept of BMV bridging finance, how it works, and what are the benefits and challenges of using it.

What are below-market value bridging loans?

A below-market value bridging loan is a type of short-term finance that allows the borrower to purchase a property at a discounted price and use the property’s open market value (OMV) as the basis for the loan-to-value (LTV) calculation. This means that the borrower can potentially borrow more than the purchase price and cover the costs of refurbishment, legal fees, stamp duty, and other expenses.

For example, suppose a property is worth £250,000 but is being sold for £175,000 due to the seller requiring a quick sale or due to a change in the seller’s circumstances. A BMV bridging lender may be willing to lend up to 65% of the OMV, which is £162,500 in this case. This means that the borrower can cover up to 92% of the purchase price with a BMV bridging loan.

An alternative and much more readily available option is to offer additional security over a property that you already own, this can allow borrowing up to 100% of the purchase price along with associated purchase costs and refurbishment costs of a property development project.

A BMV bridging loan is usually repaid within 12 months, either by selling the property at a profit or by refinancing to a long-term mortgage. The interest rate and fees for a BMV bridging loan are typically higher than a conventional mortgage, but the borrower can save money by paying off the loan quickly and avoiding early repayment charges.

A similar type of strategy can be used for larger scale property development projects where in certain circumstances up to 100% of the property or land purchase price can be borrowed followed by stage payments for the build or refurbishment costs.

What are the benefits of below-market value bridging loans?

There are several advantages of using BMV bridging finance for property investment, such as:

What are the challenges of below-market value bridging loans?

Despite the benefits, BMV bridging finance also comes with some challenges and risks, such as:

How to Apply for a Below-Market Value Bridging Loan?

Most bridging lenders generally require applicants to submit their applications through an experienced commercial finance broker, with over 30 years of experience, being based in Scotland and covering the whole of the UK we are ideally positioned to guide you through the application process.

Conclusion

Below-market value bridging loans are a popular and effective way of financing property purchases at a discount and maximising the return on investment. However, they also involve some challenges and risks that need to be carefully considered and managed. Therefore, the borrower should always seek professional advice and compare different options before applying for a BMV bridging loan.

 

According to the latest Bridging Trends report, total bridging loan transaction completions for Q1 came out at £156.78 million - a significant increase of around 8.5% compared to the same period last year.

Evidence suggests that more borrowers than ever before are using bridging finance to speed up and simplify property transactions, avoiding the complications and delays involved in arranging a traditional mortgage.

For four quarters in a row, the top reason for bridging finance in Q1 this year was purchasing an investment property - 26% of all bridging loans issued were used for this purpose. Second in line was bridging finance for speeding up property purchases, accounting for 23% of all loans issued during this period. 

The costs of taking out a bridging loan also decreased during the first three months of the year - down from 0.77% at the end of last year to a new average of 0.71%. Demand for regulated bridging loans is also on the up, which accounted for 43.9% of all loans issued - up from just 36% in Q4 2021. 

Interestingly, bridging loans for business purposes saw the greatest decrease in demand, accounting for just 10% of transactions in Q1 2022, down from 15% at the end of last year.

Borrowers Continue To Seek Innovative Alternatives

Speaking on behalf of Sirius Property Finance, Head of Corporate Partnerships, Kimberley Gates, expressed little surprise in the stellar performance of the bridging sector in 2022 so far.

“It comes as no surprise that bridging loan transactions have increased again from the previous quarter – the property market continues to be turbulent for a variety of well-publicised reasons so borrowers are looking for increasingly innovative ways to structure their debt,” she said. 

“The stigma surrounding bridging also continues to subside as more investors, developers and homeowners are starting to see it as a useful tool for realising their real estate goals and no longer as a last resort.”

Likewise, Head of Bridging at Clifton Private Finance, Sam O’Neill, spoke with confidence about the direction the sector as a whole is heading in:

“It’s good news across the board…increased borrowing and lower rates – what’s not to like? Gross lending being substantially up isn’t a surprise, looking at our figures, enquiries are up, applications are up, and completions are up,” he said. 

“The increase in chain break transactions and regulated bridging is another positive sign. An increasing number of homeowners are seeing bridging finance as something they can confidently rely on and trust as a viable financial product. When looking for reassurance that the industry is going in the right direction, we can’t ask for more positive feedback than that.”

Cash Is King

Dale Jannels, MD at Impact Specialist Finance, highlighted the important role bridging finance is playing in helping homeowners opt out of traditional property chains and complete transactions without the usual delays or complications. 

“This latest Bridging Trends [report] highlights more than ever that cash is king,” he said.

“This applies to homeowners wishing to get their offer accepted before they have sold their own property, as well as investors wanting to raise funds quickly to invest in stock or refurbish existing to achieve better yields for example.”

“The shortage of suitable housing stock will undoubtedly drive increased volumes in the bridging sector for the foreseeable future.”

Across the UK, the popularity of bridging finance has skyrocketed over the past few years. But what is it that makes bridging finance such a popular choice among private borrowers and commercial customers alike? Moreover, what are bridging loans being used to finance by those taking them out?

The Benefits Of Bridging Finance

When compared to standard High Streets loans and mortgages, bridging loans can be beneficial in the following ways:

  1. They are fast to arrange - a bridging loan of any size and for any purpose can often be arranged within just a few working days. This alone makes bridging finance the ideal facility for time-critical purchase and investment opportunities.
  2. There are no restrictions on how they can be used - unlike a traditional loan or mortgage, lenders place no restrictions whatsoever on how the funds raised with a bridging loan can be allocated. 
  3. Bridging finance can be surprisingly accessible - issues like poor credit or no proof of income that would usually result in an application being declined need not be an issue with bridging finance, where ‘subprime’ applicants are welcome. 
  4. Most property types can be used as security - a bridging loan can be secured against a wide variety of different types of properties, irrespective of current conditions. Mainstream lenders are usually only willing to lend against certain types of properties in a habitable state of repair.
  5. Bridging loans can be highly cost-effective - typically charged at a rate of around 0.5% per month, a promptly repaid bridging loan can be a uniquely affordable facility. Certainly more so than any comparable loan or a mortgage from a mainstream provider.

Top Uses For Bridging Finance

As for how bridging finance is being put to use, these are the top five uses for bridging finance among private customers and business borrowers right now:

  1. Avoiding broken property chains - bridging finance can provide homeowners with the spending power of a cash buyer, enabling them to escape conventional property chains entirely.
  2. Funding fast property purchases - similarly, investors often turn to bridging finance as a flexible facility for picking up properties at low prices at auction. Where full payment for a property needs to be provided as quickly as possible, a fast access bridging loan can be just the thing.
  3. House flipping for capital gains - property developers and investors looking to generate capital gains by flipping homes as fast as possible are also finding bridging finance the ideal funding solution. Repaid in a matter of months at a low monthly rate of interest, a bridging loan can help house-flipping investors maximise their ROI. 
  4. Funding property renovations and extensions - bridging loans can be used to conduct repairs and renovations on homes before putting them on the market, ensuring they sell for the best possible price to generate bigger profits.
  5. Raising business capital - last up, SMEs, in particular, are finding bridging finance a flexible, accessible and affordable facility for raising fast-access capital to support their businesses in turbulent times.

For more information on any of the above or to discuss the benefits of bridging finance in more detail, contact a member of the team at UK Property Finance today.

Paresh Raja, founder and CEO of Market Financial Solutions, offers Finance Monthly his predictions for the UK property market in the new year.

2020 has been, by far, one of the most impactful years of the last couple decades. COVID-19 has had a sizeable impact on the world economy, national governments, and health systems around the globe. No industry, nation, or continent has been exempt from the virus’s economic and epidemiological affects, and we are all now beginning to understand the long-lasting changes that have been brought about by the pandemic.

Despite all of these challenges, it is important not to let these developments overlook the successes of 2020. While some industries have struggled, other sectors like property have been able to quickly recover. In fact, one could argue the real estate market is the strongest it has been since the EU referendum in June 2016.

In my mind, the positive performance of bricks and mortar will continue in 2021. As such, now is an ideal time to take a step back and consider just how investors and prospective buyers can take advantage of property investment over the coming 12 months.

A standout performer of 2020

Of all the positive developments witnessed in the UK this year, the ability of the real estate market to sustain a consistent rise in transaction numbers and house prices should be applauded. However, it was necessary for the market to also recover from the initial disruption caused by the first lockdown.

Obviously, property professionals were concerned during this initial stage of the pandemic; with the UK government actively dissuading people from moving home. Lenders retreated from the market, and this resulted in buyers turning to specialist finance providers to complete on sales and prevent existing transactions from collapsing.

Of all the positive developments witnessed in the UK this year, the ability of the real estate market to sustain a consistent rise in transaction numbers and house prices should be applauded.

In May, the government announced that people could once again move home, and that those who worked in the property sector could go back to facilitating transactions. However, in a bid to further incentivise buyers and sellers back to the market, in July the government offered the real estate sector another helping hand.

8 July saw the introduction and implementation of the stamp duty land tax (SDLT) holiday. This means that buyers could now save up to £15,000 when purchasing a new property in England or Northern Ireland. Those who were skittish about completing a property transaction during a pandemic were incentivised back to the market, resulting in a new wave of transactional activity which has been maintained up until today.

Transaction numbers began to grow, and house price indexes recorded a rise in the value of British property for the first time since the 2016 EU referendum. Nationwide, Halifax and Rightmove recorded house price growth between January and November 2020 of +6.5%, +7.6% and +5.5%, respectively.

However, although buyers were keen to take advantage of the SDLT holiday, another obstacle stood in the way of many. In a bid to minimise risk exposure, mainstream lenders are still hesitant when it comes to lending. Some have tightened their lending criteria; others have taken financial products off the shelves, and it is being reported that the time it is taking to deploy loans is increasing.

There is clear buyer appetite for property, and I believe this will be the case so long as the SDLT holiday remains in play. For this reason, property investors and brokers must familiarise themselves with all their finance options, looking beyond mainstream lenders and mortgage providers.

The rise of specialist finance

A survey from September commissioned by Market Financial Solutions found that 52% of the homeowners were keen to take advantage of the SDLT holiday but were put off by the increased likelihood of being denied the necessary financing.

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Prospective buyers whose transactions were at risk of collapsing from a delay in the deployment of their mortgage have, in turn, been looking to alternative lenders. These lenders typically have access to in-house credit lines and can tailor loans to meet the unique circumstances of each buyer. As a result, specialist finance products such as bridging loans can be deployed within a matter of days.

As we enter into 2021, I can only imagine that this trend will continue. The scheduled end of the SDLT holiday on 31 March, combined with the implementation of an overseas-buyer 2% SDLT surcharge on 1 April, means there is likely to be a rush from buyers looking to complete on transactions before these dates.

From reviewing their performance this year, there is a risk that mainstream lenders will struggle to ensure that financing is deployed in time to finalise transactions before these two deadlines. As such, there is a growing case for prospective buyers to seek out mortgage alternatives, such as fast loan solutions.

An optimistic outlook for 2021

Looking to the coming 12 months, it is clear that property investment will play a defining role supporting the post-pandemic recovery of the UK economy. The SDLT holiday has been a success, and there is clear buyer appetite for bricks and mortar. For this reason, it makes sense for buyers and brokers to also familiarise themselves with alternative loan options. Doing so will ensure they can confidently complete on transactions without delay.

When searching for your dream home, you will often require a large amount of money to ensure a quick purchase.

If, for example, you intend to move to a new house and have found the home you want at a bargain price, but your current home is not selling as fast as you would have liked and you don't have the deposit for the new purchase until the existing home sells. This can put you in a sticky situation, and you are likely to lose the house to another buyer unless you can find the money quickly.

So, what can you do? If friends and family are not an option, the answer is to get a loan. You can try to go to the bank for the loan, but the process may take weeks due to the red tape. Another solution is getting a bridging loan.

Hanan Shapira, director of Property Finance Partners says "bridging loans in the last few years have begun to be more popular for homeowners looking to purchase a new residential property."

What are they and how do they work?

Bridging loans are specialised short term finance, typically acquired for between 3 months to 12 months. One of their advantages is the speed at which an application is processed. One can go from applying for a loan to money in the bank in as little as a week.

To get a bridging loan, you will have to have a property to be put up as security against the loan. You can borrow up to 80% loan to value (LTV) on the equity within your property.

Bridging loans are specialised short term finance, typically acquired for between 3 months to 12 months.

There are many uses of bridging finance such as developments, buying a property at an auction, buying uninhabitable properties or properties that require refurbishment for businesses and for buying residential homes.

How does it work for buying a home?

When you obtain the loan, you can use the money to put down a deposit for the new home, and then once your existing home is sold, you can then repay the loan. This is known as "bridging the gap." It is a common use of bridging loans and works well in the right scenarios.

Regulated vs unregulated bridging loans

If the security offered is your current residence, the loan is automatically a "regulated" bridging loan. That means the loan is regulated by the FCA (Financial Conduct Authority). Regulated loans carry an extra level of protection; consumers are protected under the MCOB(Mortgage Code of Business) rules.

If the bridging loan is obtained against commercial property, it is likely to be unregulated.

Where can I get a bridging loan?

Your first thought may be from the bank, but the majority of high street lenders don't offer bridging loans. The banks discontinued offering bridging loans after the crash in 2007-08, due to stricter regulations on unregulated home loans.

There are specialist lenders who provide bridging loans in the market, made up of hard money lenders and private funds. You will need to approach one of these lenders and package an application to them.

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Costs of bridging loans.

Something to take into consideration is the costs involved in bridging finance. Relevant fees are broken down below:

The bridging loan market is quite a competitive currently in the UK, which has lowered interest fees considerably. It is advisable to find a few lenders and to check what they have to offer.

One way of saving you time and money is to use a broker. A broker can package your application in the right way as well as find you the best deal in the market, as they will have access to many lenders.

Bridging loans can pretty much be used by anyone that needs to make a purchase in a short amount of time. However, here are just five of the most common reasons as to why an investor may need a bridging loan:

Chain Break Finance

It isn’t uncommon for a property chain to break in one of the final stages of a transaction, and it can be incredibly annoying for the investor or developer involved. A bridging loan, also known in this case as ‘chain break finance’, can be used to cover your finances while you find a new purchaser for your property.

The sale of the property will therefore continue to go ahead. Without a bridging loan, the purchase of that property would have fallen through completely.

Property Auctions

Some property investors visit auctions not expecting to purchase anything at all, and therefore won’t have any funds sorted prior to visiting. However, if a great opportunity arises at an auction, it would be a shame to have to let it go to someone else. This is again where a bridging loan comes in useful.

Property Refurbishments

Most mainstream lenders refuse to lend to investors that are developing a property that isn’t really in the best condition. However, bridging lenders (also development finance brokers) consider both the future value of the property, as well as the overall ROI, and make their services readily available as they will be able to see the benefit.

If you’re interested in purchasing an abandoned property, then it might be worth checking out this post first for some handy advice.

Property Conversions

If someone is in need for some quick funding in order to finance the conversion of a property or maybe even add an extension, then a bridging loan could be used for this.

Business Funding

Bridging loans can cover everything from initial business establishment costs to unexpected shortfalls, and even urgent tax payments that may be required, and this can often be a life saver for most business men and women who need to pay large sums within a short amount of time.

If you think that you fit into one of the categories above, and you’re in need of bridging finance, then get in touch with a reliable independent finance broker, such as Pure Commercial Finance, who will be able to help.

 

ABC Finance is a specialist commercial finance brokerage, offering a wide range of services to SMEs, landlords and property developers. Here Peter Hemming, the company’s Managing Director, tells us all about ABC Finance’s beginnings, principal services and priorities towards their clients.

 

 

What is the history behind ABC Finance Ltd.?

 ABC Finance Limited was established in 2000 and we have a rich history of supporting SMEs across the UK with their finance requirements.

We offer a wide range of finance and our focus is saving our clients’ money and making the process of raising finance fast, simple and hassle-free.

We offer finance from simple buy-to-let, to large portfolio refinances, bridging loans, development finance and a full range of business lending products.

 

Tell us a bit more about the principal services the company provides and its priorities towards its clients?

Our services can really be broken down into 3 sections.

Initially, our work with SMEs is geared toward making sure they have the finance in place to reach their goals. We work closely to understand what funding they need, how quickly they need it and for how long. From here, we work hard to secure the most suitable products on the keenest possible terms.

Secondly, we work with property investors from a single property, right up to large portfolio landlords and property developers.

Finally, bridging loans are a large part of our business, and we work with our clients to secure the funding they need, usually against a tight deadline.

 

What are the key considerations to make when assisting clients with their lending needs?

We are consultative in our approach and like to understand where a client is now, but also where they are heading. We want our advice now to centre on what is best for them not only today, but for the future too.

We want our clients to succeed, so regular follow ups are key. If a client is looking to build a portfolio of properties, or grow their business, we want to work with them. Over the years, we’ve helped countless clients to meet their financial targets and that experience can really help today’s business owners and investors.

 

 

As Managing Director, how do you ensure you are directing the company in the correct direction? How do you advise your team to make the correct decisions for the company alongside clients?

 

I’ve been in business for a long time and one of the most important lessons I’ve learnt is that there is no substitute for preparation. We plan everything and measure everything that we do. As a result, each decision we make is actually fairly simple as we can judge whether or not it moves us closer to our goal.

By understanding what we want as a business and where we are heading, I can avoid impulsive or short-sighted decisions. That is the major benefit of having such an engrained vision for the business.

 

 

Is there any advice you would give to anybody may be looking to raise finance in the near future?

 

The number 1 piece of advice would be to start looking at your finance options early. When applications are left until late in the day, clients often find themselves backed into a corner and forced to accept an offer that is less than ideal.

 

Any advisor should be happy to give you an initial idea of your options, likely costs and how long you should allow for an application.

 

When applications are pushed to the limit, whether that’s in terms of in time, or affordability, the client is always putting themselves in a high-risk position.

 

 

Website: https://abcfinance.co.uk/

From Oliver Stone’s epic Wall Street to the hilarious Trading Places and recent Scorcese hit The Wolf of Wall Street, the topic of finance has inspired many a classic film. It’s no surprise when you ponder on the varied world existing within finance, which takes in everything from making ends meet to making personal millions.

Consider the colourful characters often found within these situations and you’ve got a blueprint for classic drama. Think Gordon Gekko. Think Patrick Bateman. Think of Enron’s story and it’s hard remember where fiction ends and fact begins.

Find the 10 Best Films about Finance below. We’ve also analysed the books to discover how well each film did at the box office, compared to their monetary budget. In the film world of finance, alongside tales of highs, lows and even humour, there’s definitely some money to be made!

Infographic by ABC Finance

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