A client is purchasing a £600,000 investment property at auction, which needs refurbishment. They must raise property auction finance £300,000 to complete the purchase. This will be secured using a 1st legal charge over the new property and is needed for 6 months.
At the end of the 6-month term, the client will refinance to a buy-to-let mortgage and rent out the property.
In this situation, we could raise the money using an unregulated bridging loan at a rate of 0.44% per month, with a 1% lender arrangement fee.
|0.44% interest (£1,320) x6 months||£7,920|
|1% Lender Arrangement Fee||£3,000|
The arrangement fee can be added to the loan and the monthly payments rolled into the loan, meaning there is nothing to pay until the loan is repaid.
The total to repay would be calculated by adding the total interest and arrangement fee to the loan. In this case the repayment amount is calculated as follows:
|Total to Repay||£310,920|
In this example, the total cost of repaying the loan would be £310,920, including the cost of interest and charges.
This results in a total cost of £10,920.
In addition to the above, the client would be expected to pay a valuation fee, which is usually paid upfront, once the application is approved in principle. In this example, the valuation fee would usually be somewhere between £900-£1,100.
If the cost was £1,100, this would bring the total cost of the loan up to £12,020.
Paying off the bridging loan
In the example above, the bridging loan runs for 6 months, meaning the loan must be repaid after 6 months. As the planned exit route was to refinance on to a buy-to-let mortgage, this will be arranged and will repay the loan in much the same way as a standard remortgage.
When the buy to let mortgage is ready to complete, the solicitor would repay the bridging loan using the funds from the buy to let lender. The 1st charge currently held by the bridging lender would be removed from the Land Registry and replaced with a new charge in favour of the buy to let mortgage lender.