How Do Bridging Loans Work for First-Time Buyers?

It is often assumed that bridging finance is a facility restricted exclusively to existing homeowners; however, bridging loans can also be surprisingly flexible, accessible, and affordable options for first-time buyers.

Eligibility for bridging finance is assessed primarily on the borrower’s ability to provide acceptable security for the loan. If you have fixed assets, such as commercial property, residential property, or land, with a combined value that covers the costs of the loan, it is of no consequence whether you currently own a residential property.

When would a first-time buyer consider bridging finance?

Bridging loans differ from conventional mortgages in that they are designed to be repaid in full within a term of between 1 and 18 months. In addition, the funds can be made available within a matter of days, and after the first month, interest is charged on either a monthly or daily basis, typically less than 0.5% per month.

A bridging loan for a property purchase (when repaid promptly) can work out exponentially more cost-effectively than a long-term mortgage.

First-time buyers may consider bridging finance for several scenarios, including:

  • To purchase a property at auction at a bargain price
  • To buy a non-standard property that major lenders would refuse
  • To purchase a ‘fixer-upper’ to subsequently sell at a profit
  • To avoid the costs and binding obligations of a mortgage

Where a property is purchased by way of bridging finance, the loan can subsequently be repaid by taking out a conventional mortgage, raising the funds elsewhere, or selling.

How is first-time buyer bridging finance eligibility assessed?

For the most part, bridging finance specialists are primarily interested in the applicant’s ability to cover the costs of the loan with appropriate security. Most lenders exclusively accept residential and commercial properties and land as security.

A check on credit history may also be necessary, in accordance with the chosen lender.

Most important is proof of a viable exit strategy. This means providing the lender with a full disclosure of when and how you intend to repay the loan. For example, by selling the property you purchased and generating a profit,

How much can a first-time buyer borrow?

There are technically no limitations as to how much any applicant can borrow; it all depends on the value of the assets you offer to secure the loan. In most instances, however, bridging finance for property purchase transactions is available for up to 75/80% of the value of the property, depending on the individual circumstances of the applicant.

In all instances, it is advisable to consult with an independent broker at the earliest possible stage in order to ensure you get the best deal. Competitiveness varies enormously from one bridging loan specialist to the next, so it is important to conduct a thorough market search before deciding who to do business with.

For more information on any of the above or to discuss bridging loan applications in more detail, contact a member of the team at today.

Mortgages Brokers vs Bridging Specialists

Comparing mortgage brokers to bridging specialists is a little like comparing apples to oranges. They both exist for a reason and have their own benefits, but they are nonetheless very different entities.

The popularity of bridging finance continues to grow at its fastest-ever pace. Nevertheless, the vast majority of borrowers in need of sizeable sums for property purchases turn instinctively to mortgage brokers. The problem is that the vast majority of mortgage brokers in the UK lack the knowledge and experience to advise on alternative funding solutions.

In fact, it is estimated that less than 20% of mortgage brokers in the UK have no idea what bridging finance is or its intended applications. Let alone the expertise required to advise on bridging financial options.

The traditional mortgage broker

As the name suggests, a traditional mortgage broker is usually an independent adviser for current and prospective mortgage borrowers. They take into account the requirements and preferences of the applicant, consider their available budget, and scour the market for appropriate mortgage deals. Some work exclusively with major High Street banks, while others also consider loans from specialist lenders across the UK.

However, no allowance is typically made for the consideration of alternative funding solutions. Dozens of conventional mortgage and remortgage products may be analysed, evaluated, and presented to the client, but that’s all. If an entirely different funding solution (such as a bridging loan) represented a better option for the client, a typical mortgage broker may be unable to advise on it accordingly.

Bridging specialists

In a similar vein, alternative funding specialists work closely with major high-street names and independent lenders across the UK. They’re also able to offer comprehensive support and objective advice on all aspects of mortgage borrowing.

The difference is that a bridging specialist can also provide access to an extensive range of alternative funding solutions. From traditional bridging loans and development finance to a variety of accessible and flexible secured borrowing options, there’s far more on the table than traditional mortgages alone.

As a result, the borrower stands a much better chance of finding the perfect funding solution to suit their requirements and budget.

Accessible and affordable

The market for mortgages in the UK has traditionally been somewhat restrictive. In a working example, an individual with a poor credit score or no recent proof of income may be counted out of the running, irrespective of their current financial status.

One of the biggest differences with bridging loans (and other alternative funding solutions) is the consideration of all cases by way of individual merit. So even those who may have been turned down by multiple major High Street names could still access the financial support they need with the help of an independent specialist broker.

For more information on the potential advantages of working with an established bridging specialist, contact UK Property Finance today for an obligation-free consultation.

Longer Mortgages = Bigger Problems, Bank of England Warns

The Bank of England had waded into the rather heated debate regarding the long-term mortgage products many lenders are now offering. There’s been a distinct rise in the number of banks and building societies offering 30-year and 35-year mortgage repayment. Though supposedly to help bring down the monthly costs of repayment, the BOA warned that longer mortgage terms do little other than “store up problems for the future”.

One of the biggest issues highlighted in the report was the way in which longer mortgage repayment periods could have a huge impact on the pension savings of borrowers. By extending mortgage repayments into old age, it becomes necessary to meet them with retirement funds, which may already be stretched to their limits.

But what was interesting was how the report didn’t highlight the way in which longer mortgage repayment periods also mean massively higher overall interest payments for the borrower.

In the UK, mortgages have been offered with a standard repayment period of 25 years for several decades. However, as house prices continue to rise, borrowers have been seeking realistic ways of bringing down their monthly mortgage bills in order to get on the housing ladder. In response, banks are now routinely offering repayment periods of up to 35 years. But in doing so, the overall costs payable by the borrower skyrocketed.

Take, for example, a smaller loan of £100,000, charged at a rate of 4.5% with an initial charge of £500. Over the course of 25 years, monthly repayments would be around £556, and the total amount payable would be £167,250. By contrast, up to a 35-year mortgage, while monthly payments are reduced modestly to £473, the total amount to repay increases to £199,250, an increase of £32,000 and double the amount borrowed.

In the case of a larger loan, say £400,000, with the same interest rate and fee, the change is even more dramatic. If paid back over 25 years, you’d be looking at £2,223 per month and a total repayment amount of £667,500. Over the course of 35 years, monthly repayments come down to £1,893, but the total repayment amount increases to £795,550, a hike of nearly £130,000.

But it’s not just in the UK that this is happening, either. In most countries where wage growth is being outpaced by house price inflation, longer mortgages are being offered to bring monthly repayment amounts down. It’s particularly prevalent in Sweden and Japan, where mortgages are available with repayment terms of more than 100 years.

As far as the Bank of England is concerned, those considering signing a long-term mortgage today need to think very carefully about tomorrow. Lower monthly repayments are all well and good, but not if they make it difficult to get by in later life. Plus, the longer the mortgage term, the longer the period during which your home is at risk of repossession if you fall behind on your payments.

UK Reaches Highest Remortgaging Level Since 2009

In addition to a recent surge in the number of first-time buyers taking out new mortgage products throughout March 2017, recent figures have strongly indicated that the number of existing homeowners applying for a remortgage is also on the increase. In fact, LMS, one of the UK’s leading conveyancing firms, has just published a report suggesting that remortgaging hit an eight-year peak during February this year.

Breaking down the figures, the actual number of remortgage applications that were processed and approved this February reached a staggering 44,000, which is a record high when comparing all the previous months, covering an entire period stretching way back to January 2009. With a yearly increase averaging an impressive 35% per annum, it seems that property owners across the UK are unable to resist the temptation of remortgaging in order to lower their monthly payments, increase their borrowing terms, and release additional funds for home improvements, among an entire host of other similarly valid reasons.

However, although the remortgage sector and first-time buyer markets have experienced a notable increase in activity, it seems that traditional mortgage borrowing is entering a minor slump, with the number of conventional mortgage applications falling by a total of eight percent in February. This means that, in February alone, remortgage lending represented around forty per cent of all mortgage borrowing, which is a six-year record.

Explaining the popularity of remortgaging products

So, what are the main reasons for this substantial turnaround and considerable surge in the number of remortgage products being applied for? According to industry experts and a wide cross-section of UK economists, the average homeowner is deciding to switch providers as a means of saving money by taking advantage of the significantly low interest rates that are now attached to secured borrowing.

Another reason for the current trend is the fact that most lenders have indicated that the low mortgage rates available at present are not going to last forever, with many lenders already announcing expected increases in the coming months.

In the words of Andy Knee, who is currently chief executive at LMS, “February enjoyed the biggest boom in recent remortgaging history. Remortgage transactions rose to their highest level in eight years as homeowners took advantage of continued low rates and the opportunity to lower monthly repayments.”

“Meanwhile, inflation has risen to 2.3% and real wages are starting to fall. The consequence is that homeowners will have less in their pockets come the end of the month. Remortgaging can help alleviate a potentially difficult financial situation; for example, one in five reduced their monthly repayments by remortgaging in February,” he hastened to add.

Switching products now, before it’s too late

Since March this year, the economic climate has entered a slightly worrying phase of minor instability and unpredictability. With this in mind, the time to take advantage of the currently low mortgage rates by means of switching lenders or remortgaging with an existing provider with the aim of getting a better deal is in the here and now, before the opportunity to seize such a competitive deal passes by completely.

Bridging Mortgage

Within the formal written offer of a bridging loan, the loan is often referred to as a mortgage. The reason for this is that there are many similarities that occur between the two, and in essence, they are basically the same thing.

Bridging loans are secured as a charge on commercial and residential property or land within the UK in the same manner as a mortgage.

Some of the main differences, however, are:

  • Bridging loans can be obtained without the requirement to make monthly payments, whereas with a standard mortgage, monthly payments are always required (this does not include an equity release mortgage, which is available only to those over 55). The less stringent income requirements allow bridging loans to be taken by clients who, for whatever reason, cannot show or prove the income needed to make monthly payments. Possible reasons for this lack of income proof could be because the clients are retired and are in the trap of being? cash-poor but asset-rich, the client is self-employed but without proper proof of income, the client has a minimum income, but the reason for the bridging loan will put them in a better financial situation, etc.
  • The maximum term of a regulated bridging loan is 12 months (18 months for an unregulated loan), whereas with a mortgage, the standard minimum term is usually 5 years.
  • Credit blips can be acceptable for bridging finance, provided a suitable exit route is proved, whereas only very minimal adverse credit is acceptable for mortgage finance, and only with a very small selection of lenders.
  • Mortgages are virtually always taken on a 1st charge basis and on one property, whereas bridging finance is much more flexible and can be attained as either a 1st, 2nd, or 3rd charge and on multiple properties if required.
  • Bridging finance, in certain circumstances, can be used for the purchase or refinance of partly completed and/or defective properties as well as land with or without planning, whereas a mortgage, with the exception of niche products such as self-build mortgages, is virtually always used for the purchase or refinance of fully habitable properties, which include those having kitchens and bathrooms.
  • Bridging finance is often used for a wider range of loan sizes, starting at L10,000 and with no limits, and also for a much wider range of uses and scenarios.

The main consideration of any lender before allowing a client to take out a bridging loan is how the money will be repaid. Only if lenders are fully satisfied that the exit route is genuine and plausible will they allow a loan to commence.