Short-Lease Bridging Loans
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Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in bridging loans
Short-lease bridging loans explained
What is a short-lease bridging loan?
A short-lease bridging loan (or lease extension bridging loan) is used to extend the leasehold of a property.
If you’re looking to purchase a property with under 75 years left on the lease, the property is likely to be sold at a discount to its freehold value. The lease is then extended, ideally on completion, and the property value increases dramatically overnight.
What is a leasehold property?
With a leasehold property, although you own the property, the land on which the property is leased from the freeholder.
This means that at the end of the lease, ownership of everything on the land (your property) will revert technically revert to the freeholder.
This very rarely happens, but to avoid this, the lease must be extended and can cost a lot of money.
Why won’t mortgage lenders offer funding for short-lease properties?
The cost of extending the lease increases the closer the lease gets to expiry. This reduces the property value by a similar amount.
This makes it difficult for mortgage lenders to offer lending against these properties as they would be lending against a rapidly depreciating asset.
Key product features
Key features
| Max LTV | Up to 75% |
| Interest rate | From 0.45% per month |
| Charge types | 1st, 2nd & 3rd considered |
| Term | 1-24 months (maximum 12 months for regulated loans) |
| Interest type | Added to the loan, deducted or serviced |
| Completion timescale | 5 days – 3 weeks |
Criteria
- Residential, commercial property or land acceptable
- Available to individuals, partnerships, LLPs, Ltd companies, offshore companies, foreign nationals and pension funds
- Minimum applicant age 18 years – no maximum age
- Available in England, Scotland, Wales and Northern Ireland
- Adverse credit accepted (on a case by case basis)
- Loans from £25,000 with no maximum loan size
Short lease bridging finance criteria
Who can take out a short lease bridging loan?
Our bridging loans are available to borrowers who are applying in their own name or in a partnership.
We also lend to Ltd companies, trusts and pension funds.
What is your minimum and maximum term?
We don’t have a minimum term and can offer terms up to 24 months.
Can you lend to borrowers with bad credit?
Adverse credit doesn’t exclude you from taking out these loans. We’re can lend to borrowers with almost any credit problems, including current, immediate threat of bankruptcy or repossession.
Mortgage arrears, CCJs and defaults will not usually prevent your application from being approved.
Does the lease need to be extended on or before completion of my bridging loan?
Most lenders will expect the lease to be extended on or before completion of the loan. This will mean that the property will be extended when the lender takes a charge on the property.
Some lenders are willing to offer finance where the lease cannot be extended on completion, although this can prove more difficult.
Where the section 42 has not been issued before the property has been purchased, this can make funding extremely difficult if the lease is very short.
This is due to the two-year ownership period required to initiate a lease extension. As most bridging loans are offered for terms of between 12-18 months, they would not usually give you enough time to fund where a section 42 has not been issued.
How much can I borrow?
What are your minimum and maximum loan sizes?
The minimum loan is usually £25,000 with no maximum, meaning we can fund virtually any loan.
What is your maximum loan to value (LTV)?
Short lease bridging loans are usually available up to a maximum of 75% of the property’s value. However, some lenders will lend 100% of the purchase price if the lease is extended at the point of completion, as the property will increase in value with a longer lease.
Short lease bridging loan rates & costs
What interest rate will I pay?
Specialist short lease bridging loan lenders are fairly flexible. So, even though the lease is short and will be extended on completion, assuming that the property itself is suitable security, rates will be at the lower end of the scale.
Bridging loan rates start at around 0.43% per month and interest can be added to the loan leaving no monthly payments. Rates of 0.45-0.65% are common where the lease extension is already agreed and can take place on completion.
Where the section 42 is issued, but no agreement has been reached with the freeholder, your rate will increase, with a rate of 0.9-1.1% being realistic.
Are there other fees to pay?
Yes, in addition to the interest, there are a number of other set-up costs which must be paid during the application process. The main ones are the following:
Lender arrangement fee – This fee is usually between 1-2% of the loan amount and is charged when the loan application completes. Larger loans are likely to be closer to 1%, with smaller loans at 2%. This fee is usually added to the loan.
Lender exit fee – Some lenders charge an exit fee on their loans. This fee is usually between 1 month’s interest and 1.5%. We can often arrange loans with no exit fee and always look to do so where possible.
Broker fee – Many brokers charge a fee for their service, often between £1,000 and 1.5% of the loan amount. We don’t charge a fee for our service.
Valuation fee – The valuation fee (also known as a survey fee) is a fee paid to a chartered surveyor to undertake a report on the condition, value and saleability of the security property. The cost can vary, or may even be avoided where an electronic valuation can be undertaken.
Legal fees – Borrowers pay both their own and the lenders legal costs. The cost of these fees vary depending on the property value, the work involved in the lease, location and the loan amount required.
How to get a short lease bridge loan
Who offers bridging loans for properties with a short lease?
This is a very specialist area of the bridging loan market. They tend to be offered by unregulated bridging lenders, as opposed to the bigger lenders.
Although some lenders don’t officially lend on properties with short leases, they may consider applications on a case by case basis.
Should I use a broker or approach a lender direct?
A broker’s job is to find you the best deal and support you in your application through the process. A good broker will be able to make the process easier, leaning on their experience to avoid any potential issues before they arise.
That said, some brokers charge a fee (as mentioned above), which adds further costs. We don’t charge a fee for our service.
How long do they take to complete?
Short-lease bridging loan applications usually complete in 7 – 14 days. This is if all information, including the valuation and legal pack, is completed and satisfactory. If you require the loan sooner, please make us aware upfront.
Generally, it is worth allowing around 14 days to complete your lease extension bridging loan, to allow for any unforeseen delays.
Of course, where the lease extension is still undergoing the legal process, this will delay completion of your loan.
FAQs
How do you extend a property lease?
In order to extend the lease of a property, you must first be classified as a qualifying leaseholder. To be eligible, you must have owned the property on a long lease for at least two years.
Qualifying leases must have been issued initially for more than 21 years and can’t be a commercial lease.
To initiate the extension, a section 42 notice must be issued to the freeholder. This is assuming there is no intermediate lease between yourself and the freeholder.
The process can be tricky, and it may be best to seek advice from an expert to ensure things run smoothly.
Are bridging loans risky?
Taking out a very short-term loan will always carry an element of risk, as it must be repaid within a short timeframe. Failure to do so will inevitably put your property and credit history at serious risk.
That said, should you plan ahead to ensure that you’re comfortably able to repay the loan in time, then there’s no additional risk compared to other types of borrowing. For example, taking out a 6-month bridging loan to negotiate and extend the lease of a property that hasn’t had a section 42 issued is very risky. The freeholder does not have to extend and finance would be difficult to achieve elsewhere, meaning you could run out of time and be unable to refinance.
To keep reading, check out bridging loans for land or bridging loans London.