Cost Of Bridging Finance
Bridging finance may be applicable to you if you’re looking to invest in a property, but what exactly is it and how much will it cost you? Today we’re going to help you understand what costs are associated with bridging finance in the arena of buy-to-let or HMO investors rather than bigger scale developments.
What Is Bridging Finance?
Here at DJF Asset Management, we specialise in loans of between £25,000 – £750,000. This is certainly the amount you would need for a smaller scale buy-to-let or house of multiple occupancy (HMO). Bridging finance is essentially bridging a gap in finance where you may need it in the absence of your own money or a mortgage. People would typically use bridging finance if they were to purchase a home that is classed as unlivable, so it doesn’t have a bathroom or a kitchen, if the sale of their home hasn’t gone through before having to finalise the purchase of their future home, or to get short-term finance for a property that is bought at auction. Typically when you buy a home at an auction, you have around 30 days to finalise the transaction which would simply be too short of a time-frame to sort out a mortgage. In this scenario, a bridge can be obtained swiftly over the course of a few days or weeks compared with a mortgage that can take a few months.
What Are The Costs Associated With Bridging Finance?
Because these loans are designed to bridge a gap and ideally used best as a short-term loan while your development is in the works, the costs associated with them are generally higher than that of a mortgage. The total interest on the loan would be generally between 15-18%, with 2% being required as an upfront payment. Ongoing, there would be a 1-1.25% additional charge per month on the finance and a 1% exit fee. Other fees involved would be an administration fee of £895.00, a survey is required at a cost of £300-500.00 and solicitors fees of £1,200 – £2,000. When you decide that you’d like to opt for a bridging loan, we can lend up to 75% of the current market value and funding able to arrive with you in around 10-20 days.
An Example In Action Of Bridging Finance
If you were to purchase a property with a current market value of £65,000 and opt for a bridging loan, we would be able to loan up to £48,750, as that’s 75% of that amount. We would essentially be buying this property for £12,050. With an 18% loan for the year on the bridging loan, this comes to £8,775, plus £3,395 ongoing. If we estimate a renovation cost to be £7,000. Let’s say that after the renovation, the property’s new market value would be £80,000. The total fees including those mentioned above and stamp duty would be £73,000. A mortgage for £60,000 after the renovation would leave roughly £13,000 money in. You’d probably have around £550 per month rental value, minus £55 for agency fees, £50 for operating expenses, £200 for the mortgage, leaving £295 per month. Over one year, this property would bring in 3540. This is a 27% return on investment.
If you have any questions at all about bridging finance, or you’d like to enquire about using us for your next project, please do get in touch as we would be happy to help. We can also offer advice on any property investment or renovations you currently have in the pipeline and can also offer investors good rates of return on their money if they choose to invest with us. To find out more, you can reach out to us through our social channels, through email at info@djfam.co.uk or contact us through calling 0207199648.