Dear Delia

Dave is an experienced buy-to-let investor who sees opportunities in the current market to grow his portfolio. He has agreed to buy a discounted property in a private sale and the vendor wishes to complete as quickly as possible. The agreed purchase price is £200,000 but the property\'s true value is £235,000, which he knows valuers will confirm. How can he maximise his borrowing and save his cash for further purchases? Delia says: A bridging loan may be the solution as Stuart Law of Assetz Finance and Steven Marks of Newcastle point out. Have you got a problem for Delia? Email mortgage.strategy@centaur.co.uk

Intermediary response
Stuart Law is chief executive of Assetz Finance
In common with many investors in the current market, Dave has the chance to capitalise on one of the many good deals available as vendors opt for quick sales. This will allow him to make savings and free up capital for other purchases.

Assuming that the property is over 12 months old and a valuation of £235,000 is obtained, the most cost-effective way to fund the transaction is a simultaneous bridging loan and refinancing scheme.

A bridging company could fund the purchase with an 85% LTV loan based on the valuation. This would give Dave an initial amount of £199,750 so he’d only need £250 of his own money to meet the purchase price.

At the same time a remortgage could be put in place for the required amount, securing long-term funding at a cheaper rate.

Dave would need to get the remortgage pre-approved, the valuation carried out and the mortgage offer issued to reassure the bridging company that its loan would be repaid immediately.

The remortgage borrowing would be based on the property’s potential rental yield, which would need to be at least £1,250 per month.

Two-year discounted trackers at 5.99% are available for the remortgage with an arrangement fee of 2.5% added to the loan. In today’s market this is competitive.

The bridging loan would cost 0.5% of the loan amount with associated legal fees of around £3,500 including Stamp Duty. Allowing for all fees, Dave would pay around £5,550 to complete the purchase compared with a 15% deposit of £35,250 if he opted for a traditional mortgage. This would leave him with significant funds to grow his portfolio.

But the panel of lenders offering bridging loans is limited. Dave will need to be meticulous in his search for the best deal and he must seek advice from brokers with experience in the field.

Bridging funds are held by solicitors for no more than 24 hours and bridging lenders will usually issue short reports to ensure there’s nothing unusual about property titles. At the same time full title reports are carried out for lenders and once they send the required funds to solicitors the money is released. The downside is that clients also incur costs setting up remortgages.

Lender response
Steven Marks is lending and operations executive at Newcastle
Dave has some additional value locked up in the deal and the main issue is how he can borrow against the full value of the property rather than just the purchase price as would normally be the case.

Most lenders will advance a maximum percentage of the purchase price or the value, whichever is lower.

In this case a normal buy-to-let mortgage would provide Dave with 85% of the purchase price or £170,000, so he would still need a deposit of £30,000. But if he opted for one of our bridging products he would only have to pay the associated fees.

In situations like this where a discount is being obtained, we will advance up to 100% of the purchase price as long as it does not exceed 85% of the property’s value. In this case we would advance £200,000.

While arranging the bridging loan for Dave, his broker should also source a buy-to-let mortgage with another lender. As it’s a remortgage rather than a purchase, the other lender, known as the exit lender, will provide 85% of the property’s value.

With a mortgage of £200,000 against a property valued at £235,000, Dave can achieve his objective of maximising his borrowing against the property while saving his own cash for future purchases.

Sourcing one of our bridging products is simple. Brokers provide us with a completed application form, a copy of the exit lender’s valuation report and remortgage offer plus proof of the customer’s identity and residency. No rent tests or credit searches are carried out and the offer is usually issued within 48 hours.

We offer two types of bridging product. The first is a 30-day loan where a minimum of 30 days’ interest is paid and the remortgage must be arranged during that time. The other is a day one bridge where the purchase, drawdown and repayment happen on the same day. They have different fee structures but deliver the same result.

One note of caution. In the buy-to-let market, lenders are taking a firm line on new-build properties, particularly flats. It is well known that in many city centres around the UK there is an oversupply of such developments, resulting in high numbers of unsold units, falling values and difficulties obtaining tenants. As a result brokers and their customers must consider the types of property buy-to-let lenders will accept.

The mortgage offer from the exit lender is crucial to the process. But assuming this is in place, bridging loans can play a valuable role helping investors take advantage of property discounts.