Bridging Finance - A Property Developers Most Powerful Weapon
- Connor Ross
- 1 day ago
- 5 min read
Have you heard that bridging finance is too expensive? Have you heard that bridging finance will get you in to trouble? Let this article explain how property developers use bridging finance as their money maker. It can be the most cost effective way to finance a property, it can help you reach your financial goals much faster, and you can make more money than using cash to fund everything. Sound too good to be true? Read on.
Now you are probably pretty suspicious reading this about how bridging finance can work out as more cost effective than something like a buy to let mortgage and very suspicious of how it can be more profitable than using cash, so let me explain. If you are picking up an investment property which is more of a project, a 'doer upper' or a 'flip', then doing this on something like a buy to let mortgage or purchasing in cash, both have their drawbacks.
To explain this further, I will give you some case studies and I will use the same numbers for each comparison, purchasing a property for £100k which needs £20k of works, which will be worth £150k after these works. Lets also assume the person purchasing has £120k to start, enough for the purchase and the works.
We have a custom built bridging finance calculator, loaded with current lenders rates, if you would like to play with some numbers.
Bridging Finance vs Buy to Let
Traditionally most landlords look to leverage a buy to let mortgage up to 75%, although there are some products out there these days at 80%, but lets keep this traditional at 75%. (Check out our buy to let calculator to play around with some numbers)
In both of these options, you will refinance to get your money out and be left with a buy to let mortgage on a property worth £150k. We are just comparing how much money you spend, make and how long it takes you to realise your profits.
As a deposit, you would place down £25k, borrow £75k and then spend a further £20k on works to the property, meaning you have put £45k into this property, which is now worth £150k. This sounds great at surface level, you have gained £30,000, but how are you going to access this money? You will either have to wait until the end of your fixed rate period and refinance at this point to pull out the funds, or pay an early repayment charge, which seems counter-intuitive.
To summarise, you started with £120k in the bank, you have put £45k in at the beginning, leaving £75k, and waited 2 years to pull out £37.5k. You now sit at £112.5k cash, £37.5k equity. You have taken your £120k and turned it in to £150,000, that's great! This however has taken you 2 years to 'realise' this profit by getting your money out, which works out to £15k a year profit.
This strategy does work, its just slow and in todays world, slow is not optimal. Still following? Great!
Now lets look at the bridge, for comparison. At this sort of property value, you could expect your maximum loan bridge on a retained basis to be around £65k, which would grow into a £75k balance at the end of the term. So in this scenario, you need to place £35k down as a deposit (seen as a £25k deposit and £10k interest), then £20k for works. You now have a property worth £150k and the bridge is coming to the end of its term, its now time to refinance without any penalties. Lets assume worst case scenario here that the project has taken the entire term of the bridge, 1 year. You now refinance and take your loan to 75% of the £150k.
To summarise, £120k in the bank to start, £55k in at the beginning, leaving £65k. You pull out the £37.5k (£102.5k) and have the same equity of £37.5k, so you have only managed to turn your £120k into £140k, but this has only taken you one year. This works out as £20k per year, compared to the £15k per year option above, that's a 33% improvement!
So how does this work? The advantage here for bridging finance is the short term nature of bridging, meaning you realise profits faster. This example was also taken to the most extreme with the bridge running to full term, if you manage to complete the refurb much quicker, you save on the interest on the bridging loan as the interest is charged pro rata. Lets say you complete the refurb and refinance after 9 months, you will be refunded the interest you paid from the end of month 9 to the end of month 12. This would mean you realise your profits even quicker, release even more funds and the comparison to the traditional buy to let route really does get blown out of the water.
Shall we compare bridging vs cash? lets do it!
Bridging Finance vs Cash
Now on this one, you may need to bare with me as of course, looking at any one project the profit margin is higher when you are not paying interest compared to when you are. That being said, this one isn't the same fight as both cash and bridging are just as fast as one another and bridging has a powerful use here.
So what does bridging offer that cash doesn't? Leverage!
Using the numbers above for the bridge, this project takes £55k of your capital when using a bridging loan, leaving you £65k behind, meaning theoretically, you could have 2 projects at the same time, which is not possible when using cash.
Completing this project in cash is as simple as £120k in and £150k out, its £30k profit.
Compare that to running 2 projects at the same time, meaning 2 lots of the 'reduced' £20k profit in the same timeframe, £40k profit from the same pot of money and 2 buy to let properties instead of 1, generating you more rental income. Remember, the quicker you complete the project, the higher the profit margin on the bridge too. Impressive isn't it?
Strategic use of finance like this is what I pride myself on at BridgeCross Finance. I believe that finance as a whole can be seen as a tool to grow profits. When you have a broker with a strategic mind who is willing to think outside the box, you can reach your financial aspirations sooner than you think.
Thanks for reading - Connor.
Want to crunch some numbers? Check out our Bridging Loan Calculator.
Have a scenario you want to run by me? Book a free consultation with myself, I am always happy to chat!
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