Bridging offers the answer to discounted family purchases
Andy Georgiou is business development manager at London Credit
Buying a property is becoming ever more expensive. The stamp duty holiday has led to an explosion of activity within the housing market, with transactions in May 2021 higher than every other May in the last decade, bar 2014, according to figures from HM Revenue & Customs.
That heightened level of activity has inevitably pushed house prices up too. Data from the Office for National Statistics (ONS) shows that property prices have jumped by 8.9% over the last year, while Rightmove has reported that more than a third of buyers are currently paying at least the asking price, if not above it, a record high proportion.
Given these financial trends, it’s perhaps no surprise that some investors are starting to look closer to home when it comes to adding to their portfolios.
We have seen a notable number of investors purchasing a property owned by a relative. This often comes with the added benefit of being able to land that property at a price below what they may have paid if purchasing from a stranger if purchasing through the regular process.
Funding a family purchase
Securing a property for less than what it would fetch on the open market is obviously great news for the buyers, but it can pose a problem when you consider how that buyer is going to fund the purchase.
Generally traditional mortgage lenders don’t want to know in these cases. Their funding calculations are based entirely on the open market value of an asset, and the complications of a ‘discounted purchase mean that they are unwilling to help. This can leave brokers and their clients in a difficult spot, searching for an alternative option which will mean they can secure that purchase opportunity.
But that’s where a bridging loan can prove invaluable.
Some lenders, like London Credit, are able to provide the initial funding for the transaction through a form of bridging loan. This facility allows the buyer to complete the purchase and secure the keys to their new home. This works well as we do not expect a personal stake from the buyer and are able to provide 100% of the monies required to purchase the property. In some instances, we may be able to provide more than 100% of the purchase price to fund works, as long as the loan remains within our LTV limits for the on market value.
A bridging loan is a short-term option however; it isn’t an ideal vehicle for the borrower to sit on permanently. So, once the purchase is completed, the buyer can simply take out a buy-to-let remortgage deal against the property, allowing them to clear the outstanding bridging loan and get on with finding a tenant.
After all, at this point they already own the asset, so the issues that prevented the mainstream lenders from considering the case initially have now evaporated.
It all comes down to how that differential between the open market value and the actual purchase price is handled. This is what makes life complicated for high street lenders, who base their lending entirely on the value of the property, but for nimble lenders like London Credit we can instead bracket that difference as a gift from one family member to another.
As a result, the fact that the purchase itself is going through at a lower price than might be possible if sold on the open market does not pose a hurdle to the case concluding.
Taking a personal approach
Ultimately, this all comes down to how lenders approach each case. While some will prefer a tick-box system, where they will only consider deals which fall within somewhat narrow parameters, others take a more personal approach and assess each case individually, and in detail.
At London Credit, we pride ourselves on taking this more personal approach. It allows a lender a much greater insight into the case in question, and most importantly the borrowers, and allows a greater number and variety of transactions to go through.
As a result, it’s crucial for brokers to think carefully about the lenders they work with on these cases which are a little out of the ordinary and identify lenders who can not only guarantee the funding in a prompt fashion but who will also take a more rounded view when assessing applications.