By Holly Andrews, Managing Director of specialist bridging and development finance broker, KIS Finance.
High street lenders and building societies can deem some properties to be un-mortgageable if they have certain issues.This limits the number of potential buyers as anyone needing a mortgage to buy the property will be unable to do so.
This guide will explain how bridging finance can be used in these situations so you can still purchase the property you want, even if you don’t have the cash available.
What makes a property un-mortgageable?
The following list outlines some factors that can make a property unfit for mortgage lending;
- Unusable kitchen or bathroom – to be able to get a mortgage, the property must be fit for someone to be able to live in it. This means it needs both a working kitchen and bathroom.
- Close to, or above, certain commercial property – lenders have their own suitable lending criteria regarding this, but as an example, it is harder to get a mortgage on a flat above a chip shop due to the increased risk of fire.
- Properties of any non-standard construction or made from unusual materials.
- If it is a leasehold property with a short lease – a lease is deemed as short if it is around 70 years or less in length.
- Japanese knotweed growing on, or nearby, the property -Japanese knotweedis notoriously difficult to get rid of – the roots can go 7ft underground and the weed can cause damage to buildings, underground services and landscaping.
- Low value properties – lenders often have a lower limit when it comes to property value that they will lend on – usually £50,000.
- Derelict or old properties with weak infrastructure – for example; a damaged roof, a lot of rot or water damage or a crumbling staircase.
How can bridging finance be used to purchase an unmortgageable property?
Unmortgageable properties are often sold at auction for a fraction of the price that they could be worth – this means they are a good opportunity for both property investors and homeowners who are looking for a bargain.
The great thing about bridging loans is that they can be secured on any property, including properties that are unfit for mortgage lending for any of the reasons mentioned above.
The idea behind using a bridging loan for this purpose is to borrow more than the purchase price so whatever problems that are causing the property to be unmortgageable can be fixed. Then, as the property’s value should have been increased and it is now fit for mortgage lending, you will be able to obtain and secure a mortgage on the property and use it to repay the bridging lender (this method of repayment is known as re-financing).
It’s important to note that the bridging loan will be secured against the property you are buying, but you will also need additional security to borrow more than the property is worth (typically a current property that you own), so this option maybe unsuitable for first-time buyers, unless you have family members who are willing to let you use their property as additional security.
The benefits of using bridging finance
There are several benefits to using a bridging loan, some of which are listed below.
The speed it can be arranged
Bridging loans can be arranged very quickly, sometimes funds can be in your bank account within as little as 48 hours. This is ideal if you are purchasing a property at auction due to the limited timescale you are given to complete a sale.
Ability to borrow the full purchase price
If you have additional security, as mentioned above, it is possible to borrow the full purchase price of a property, plus more to carry out renovations and building work.
No monthly repayments
With bridging finance, the interest is added to the loan facility which means that no monthly repayments are required, and everything can be paid off together at the end of the term.
Flexible lending criteria
The lending criteria for bridging finance is generally a lot more flexible than for most other finance facilities. As no monthly repayments are required, your income is not assessed. As long as you have sufficient security for the loan and a clear, viable exit strategy, you should be able to qualify for a bridging loan.