Below Market Value Bridging Finance

Below market value finance is where a property is sold at a price that is less than its open market value. For example, if a house is worth £350,000 and is sold at £300,000 through a direct negotiation rather than being placed on the market through an estate agent.

Bridging finance, which is a fast and flexible short term loan using property as security,  is available in below market value situations. This type of loan can be helpful for borrowers as lenders look at the open market value rather than the purchase price, enabling a buyer to obtain a property that they might otherwise be unable to afford. Read on to find out more.

What is below market value bridging finance?

When a property is sold at a discount to its open market value in a direct arrangement this is known as a below market value transaction. Definitions of the open market vary, however, the term refers to the price the seller would likely achieve for the property if sold through an estate agent in a traditional manner allowing potential buyers to make offers.

Bridging financiers provide loans on below market value properties using the open market value rather than the sale price. In this scenario, a buyer could agree to buy a below market value property and then arrange a bridging loan based on the actual value of the property. This means the buyer would be able to achieve a larger loan than a mortgage, which is based on the sale price. This frees up funds for renovation or investment or in many cases allows people to take advantage of a good deal.

How does Below Market Value finance work?

Mortgage loans are offered against the sale price of a property, whereas bridging finance on a below market value property are offered against its estimated open market value. 

Bridging finance can allow for a larger loan than a mortgage, although regulated bridging loans typically allow a lender to borrow up to 75% of the equity in a property. Equity is the amount a property is worth minus any loans secured against it.

Lenders will look to see a clear exit strategy showing how the loan is going to be paid back, Interest is accrued on a daily basis and repaid at the end of the loan term.

Why would someone sell below market value?

There are a number of different reasons why someone would choose to sell a property at a reduced price and often it is because a direct sale will progress quickly and funds are required urgently.

Other reasons for a below market sale are potential repossession, divorce, a death or change in circumstances such as the need to move to a care home. Many parents choose to sell a property to their children at a reduced price to get them onto the property ladder.

Are you allowed to sell a property below market value?

Yes, you can choose to sell your property for whatever value you decide upon and this is perfectly legal. 

Do not feel pressured into selling your home if this is not a choice you wish to make. 

Whilst selling a property at below market value is an option for some, it does mean that you may lose out on a substantial amount of money compared to a sale at an open market rate.

If you need to raise funds quickly there may be other options and so speak to a broker such as ABC Finance who can work with you to find the best financial product for your situation. 

If you are experiencing financial difficulties it is best to seek professional advice before proceeding with a sale.  Speak to a debt charity such as Stepchange for free advice.

How to get below market value financing

Typically below market value loans are bridging loans used in the short term and secured against property. As below market loans are niche and not offered by mainstream financial providers,  it is worth using a broker to match you with a lender.

What is the eligibility criteria for below market value finance?

To apply for a below market value bridging loan you will need to be 18 or over and a UK resident. Most bridging loans have an upper age limit, however, below market value loans  do not tend to have an upper age limit.

A minimum of 15% of the property’s value is required for a below market value loan. Income from property, pension and employment is accepted and lenders have less of a focus on income as the majority of security for the loan is secured against property.

When can below market value financing be used?

Below market value financing is common in the investor community where a property is sold at a discount, often at auction, as it needs substantial work before it is habitable. A mortgage would not be offered in this situation, however a bridging lender would look at the value of the property once work is complete and provide a loan on that basis. 

Auction sales also require full payment within a month of purchase and a speedy bridging loan is perfect for this situation. 

Bridging finance is also useful for properties that are being built, a loan is taken on the value of the completed property rather than the cost of the build. This short term finance allows work to progress. An exit strategy in this situation would be a sale or refinance to a mortgage.

What are the benefits of bridging finance?

Bridging loans can be a useful form of short-term finance that can be made available quickly for a range of purposes from property and land purchase to renovation. 

This type of finance is flexible and bridges the gap when other options may not be available; for example if a property is inhabitable and a mortgage would not be possible.

Below market value loans allow investors to capitalise on properties with a low purchase price, or properties with significant potential that need investment.

As the loan is largely secured against property, or other valuable assets such as antiques, or classic cars, income is less of a consideration for lenders.

How much can I borrow?

Bridging loans are regulated by the Financial Conduct Authority in the UK at up to 75% of the property’s value, a loan beyond this amount is possible although it is an unregulated bridge. 

Most lenders will work on a regulated loan basis of 75% although some will extend this to 80% for an unregulated bridge. Unregulated bridging more often applies to semi-commercial and commercial projects of exceptional value.

There are circumstances where significant loans at higher loan to value percentage can be offered and it is worth speaking to a specialist broker, such as ABC to discuss options. We can match you with the right lender from our panel of experts.

We offer bridging loans from £10,000 with no maximum loan size. We can offer large bridging loans and could consider funding for £8m, £50m or even £250m depending on your situation.

Bridging loans can be arranged relatively quickly, ordinarily within 5-21 days. On rare occasions a loan can be approved in a few days although this is not typical. Here at ABC Finance we can give a funding decision within two hours and if you need fast funding we can work to arrange a quick loan.

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What Costs involved in a bridging loan?

A bridging loan is a legal arrangement where a ‘charge’ is placed on a property giving a lender an interest in the property, as such there are a number of related fees. In addition to interest payments for the loan, you can expect to pay arrangement, exit, administration, valuation and legal fees.

Always keep in mind the total cost of an arrangement and any hidden fees. Using a broker and taking legal advice will minimise any nasty surprises. 

• Interest rate – Bridging loan interest rates are currently between 0.47-1.25% per month. Interest rates on your loan can vary depending on how much equity you have in your property, the loan to value (LTV) required, if you take a fixed rate or variable rate product and whether you have poor credit. In some cases, large bridging loans (those over £1,000,000) may get a better rate.
• Lender arrangement fee – Fees tend to range between 1% – 3% of the loan amount on bridging finance, however most lenders charge a 2% set-up fee when the loan is set up. This fee can usually be added to the loan. The fee is sometimes reduced for larger loans.
• Valuation fee – Valuation fees are payable where a valuation is required. The fee generally covers a basic survey of the property. Where heavy refurbishment works are being undertaken, the lender may insist on a more detailed report. Some bridge loan lenders do offer desktop or automated valuations (AVM), there is usually no charge for this.
• Legal fees – You will be required to pay the lender’s legal fees in most cases in addition to your own if you choose to use a solicitor. This is common for bridging loans. These fees vary depending on the size of the loan, the number of properties that you’ll be securing against and the type of property itself.
• Broker fees – Some bridging loan brokers charge fees for their services, either a fixed cost or a percentage of the loan amount, some also charge upfront fees. At ABC we don’t usually charge a fee for our services, however occasionally we may have to and if so, we’ll disclose this upfront, before you submit a bridging loan application.
• Exit fees – Some bridging loan lenders charge an additional fee when the loan is repaid, usually 1-2% of the loan amount. Where possible, we avoid using lenders who charge exit fees.