Often the make or break of a property project is the funding.
The money you borrow allows you to access the profit margin, or rental income of the project, so if you can’t borrow the money to buy the project, you don’t get access to the profit or rental income.
Understanding your financing options and having the finance knowledge to creatively structure finance to make it work means you will be able to buy more deals and subsequently make more money.
Below, we’ll break down the finance options, which are relevant for both private purchases and purchases made via a company.
Mortgages
Most people know and understand mortgages because 80%* of all property purchases incorporate a mortgage. If you look at the range of funding options available to you, mortgage lending can be summarised as long term, lowest cost and most risk averse lending.
Mortgage companies tend to have a lot of checks before they lend money, as they want to ensure you’re going to pay your fees for the next 25+ years without issue. However if you try to use mortgages over a short period of time (less than a year), mortgage companies can often take a dim view of this and blacklist frequent short term mortgage swappers.
Mortgages therefore can be seen as a good option once you have completed a project and decide refinance the project to add to your portfolio.
A mortgage company will lend you a % of whichever is the lowest between the purchase price and the valuation, which on BTL is usually 75%.
So, for example, if you’re buying a house which has been valued at £200k but your agreed purchase price is £150k, the mortgage company will lend you 75% of £150k which is £112,500 and you have to find the rest, including the refurb cost.
If the refurb cost is £50k and the end value of the project is £300k, you will need to contribute £87,500 as well as all your purchasing costs and taxes.
Bridging Finance
Instead of using a mortgage to initially purchase your project, you should consider bridging finance, especially if your project has a potential uplift in the value, for example, if you’re refurbishing the property.
Bridging finance companies calculate the amount you can borrow differently to mortgage companies.
They can look at the value of the property, regardless of the purchase price. So, using the numbers from the previous example, the bridging company will calculate what they can lend you based on the value of £200k valuation, even though you’re buying the property for £150k.
Bridging tends to lend on a slightly lower LTV, usually around 70%, but working from the property’s value rather than the purchase price can result in a much bigger loan.
For example, a 70% LTV could result in a £140k loan. But the benefit of bridging doesn’t stop there because we also have works costs and the bridging company can help there too.
Bridging finance companies can also lend the works costs, although the amount of the works they lend can differ from one lender to another. There are companies who will look at lending up to 100% of the purchase and 100% of the works, so looking at the numbers (£150k purchase and £50k works on a valuation of £200 and GDV of £300k) you could borrow all £200k required for purchase and works, which wipes out your need to contribute the £87,500, although bear in mind you will still have to fund the costs associated with the purchase.
P2P Lending | Sourced Capital
Sourced Capital are just such a lender. They assess each deal on its merits, and if the deal has the right margins and security, they can lend up to 100% of purchase and build costs.
As if this isn’t enough of a reason to consider bridging finance, bridging finance is also much faster than mortgage finance, which is why it has traditionally been used to finance auction purchases. Bridging finance can be turned around within 30 days.
Overall, bridging finance can be seen as short term, higher cost and faster turnaround. Bridging offers serious benefits and when you understand bridging it empowers you to outcompete the other investors who are competing to purchase the same properties as you.
To find out more about the funding options for our franchisees, download our prospectus here.
