, Property
A three-bedroom semi with a skip outside and scaffolding on the gable. Bought at auction for £142,000 in April, budget of £45,000 to bring it back, projected value £245,000, and a plan to refinance onto a buy-to-let mortgage in September. The bridging loan is twelve months at 0.89% a month.
It is now August. The roof took six weeks longer than the quote, the electrician moved to another job in June, and the building is still not habitable. The loan expires in April, and from that date the rate is not 0.89%.
Monthly rates and annual arithmetic
Bridging finance is quoted monthly because the terms are short, and the monthly figure is a smaller-looking number than the annual one. Rates move with the market and with the risk, but a straightforward first-charge bridge on a residential investment property is typically priced somewhere under or around 1% a month, with second charges, heavier refurbishments and unusual security costing more.
The interest is only part of it. There is an arrangement fee, commonly around 2% of the gross loan, deducted from the advance. There is often an exit fee, sometimes 1% of the loan and sometimes 1% of the end value, which is a very different number. There is a valuation fee, the lender's legal fees as well as your own, and usually a broker fee.
Add them up as a total cost in pounds over the expected term, not as a rate. On a £160,000 gross facility held for nine months at 0.89% a month, with a 2% arrangement fee and 1% exit fee, the finance cost is somewhere in the region of twenty thousand pounds before anybody has laid a brick. That is a real number in the appraisal, and it is the one that most novice developers leave out or understate.
Then note the difference between gross and net. The gross loan is the headline facility. The net advance, the money that actually reaches the solicitor for the purchase, is the gross less the arrangement fee and, if interest is retained, less the interest for the whole term. A 75% loan to value that arrives as 68% of value in cash has moved the deposit you need, and finding that out at completion is not the moment.
Rolled up, retained or serviced
There are three ways to pay the interest and they have different consequences for your cash.
Serviced means you pay it monthly from your own resources. It keeps the loan balance flat and it requires income, which on an empty building under refurbishment you do not have from the asset.
Rolled up means the interest accrues and is added to the balance, settled in full on redemption. Nothing leaves your account during the works, and the debt compounds, so an overrun costs more than the arithmetic suggests.
Retained means the lender deducts the whole term's interest from the advance at the outset. You borrow the interest along with the money. It is the most common structure on refurbishment bridges and it is the reason the net advance is so much lower than the gross. If you redeem early, most lenders rebate the unused interest, but check whether there is a minimum term, commonly one to three months, below which they do not.
Lending is usually capped at around 70% to 75% of value on a standard bridge, and heavy refurbishment or development lending works to a percentage of gross development value with drawdowns released in stages against a monitoring surveyor's reports. Every stage inspection costs a fee and takes time.
One regulatory point. Where the loan is secured on a property that you or an immediate family member occupies or intends to occupy, it is a regulated mortgage contract, the lender must be authorised by the Financial Conduct Authority, and the term is limited to twelve months. Bridging on an investment property you will not live in is generally unregulated, which means the protections are contractual only, and the contract was written by the lender.
The exit has to be real
Every bridging lender asks the same question first, and it is the only question that matters: how does this loan get repaid.
There are two honest answers. You sell the property, or you refinance onto a term loan. Anything else, including a vague expectation that you will have money by then, is not an exit, and a lender that accepts it is not doing you a favour.
Test it properly before you draw down. If the exit is sale, ask what the property realistically sells for and how long sales in that street take, in a bad market rather than the one you are in today. Add three months to the marketing period and see whether the loan term still works. If the exit is refinance, get a mortgage broker to confirm in writing that a lender will lend on that property, at that value, to you, at that point, and check the criteria on ownership period, because some term lenders will only lend against the purchase price rather than the new value until you have owned the property for six months.
Then look at what happens if you are late. Default rates on expiry are steep, frequently double the contractual rate or more, and they apply to the whole balance. The lender can also appoint receivers over the security, and on an unregulated loan they will do so without much ceremony. Extensions are usually available, at a price and a fresh fee, and only if the lender believes the new exit date. The one thing that makes an extension easy is having told them about the problem in month six rather than month eleven.
Build the term with slack in it. If the works are a four-month programme, do not take a six-month loan. Take twelve and redeem early, because the cost of unused months is small next to the cost of the ones that run over.
The refinance is the hard part
Getting off a bridge is where most of the pain sits, and it is a sequence rather than an event.
The property has to be lettable and mortgageable, which for a buy-to-let lender means a working kitchen and bathroom, safe electrics with certification, a gas safety certificate, and an EPC that meets the minimum standard for letting. A building that is 90% finished is 0% mortgageable, and the last 10% is usually the part that involves waiting for somebody.
The valuation has to come in. If the surveyor values at £228,000 rather than the £245,000 in your appraisal, the term loan shrinks, and the gap between it and the bridge redemption figure has to come out of your own pocket on the day.
And a tenant helps. Many lenders will complete on a vacant property, some want it let, and rental cover is stress-tested, so the rent has to support the loan at an assumed rate well above the pay rate.
Start the refinance application at least eight to ten weeks before the bridge expires, not four. The lender you have lined up will take longer than they say, and the one thing you cannot buy at the end is time.
Where this shows up in the game
Development and lettings arrive in Business Baron with the Property & Construction Track, an add-on to the full game. Finance costs run whether or not the site is busy, and a project that overruns spends its margin before anybody notices the profit has gone. The bank manager behind the facility is a named person who remembers how the last one went.