Not all homes fit neatly into the box that traditional mortgage lenders prefer.
Whether due to structural issues, unusual construction, or legal complexities, some properties find themselves labelled as “unmortgageable”. This can leave property investors and homeowners in a challenging position.
But there is a solution: bridging finance.
Are you finding it difficult to finance a property that lenders won’t touch? This guide will walk you through how bridging finance can help, what to consider, and whether it’s the right choice for your situation.
What Makes a Property Unmortgageable?
Before we explore solutions, it’s important to understand why some properties don’t qualify for traditional mortgages.
Main lenders avoid properties that present higher risks or potential complications.
Here are some common reasons:
Structural Issues: Severe problems like subsidence, rising damp, or a deteriorating roof can make lenders cautious.
Non-Standard Construction: Properties built with materials or methods outside the norm, such as concrete prefab houses popular in post-war Britain, often raise concerns for mortgage providers.
Short Leases: In England and Wales, properties with leases shorter than 70 years can be difficult to mortgage.
Uninhabitable Conditions: If a property lacks basic amenities like a functioning kitchen or bathroom, most lenders will not be able to provide financing.
Legal Complications: Issues like unresolved boundary disputes or ongoing legal proceedings can complicate mortgage applications.
Some uniquely British property quirks can also cause difficulties.
For instance, flying freeholds (where part of a property overhangs or underlies another) or properties affected by major infrastructure projects like HS2 can face additional scrutiny.
Is your property facing any of these issues? It’s worth assessing before you start your financing journey. A professional survey can help identify potential obstacles.
Understanding Bridging Finance
Enter bridging finance – a flexible, short-term funding option that can help where traditional mortgages fall short.
But what exactly is it?
Bridging loans are designed to ‘bridge’ a financial gap, typically for a period of 3 to 24 months. They’re secured against property and can be arranged much faster than traditional mortgages – often within a matter of days.
Here’s how bridging finance differs from standard mortgages:
Term: Bridging loans are short-term, while mortgages are long-term (usually 25-35 years).
Interest Rates: Bridging loans have higher rates, reflecting their short-term nature and increased risk.
Repayment: Interest is ‘rolled up’ and paid at the end of the term, along with the principal.
Speed: Bridging loans can be arranged much faster than traditional mortgages.
Flexibility: Lenders are often more accommodating on the property type and borrower circumstances.
It’s worth noting that in the UK, bridging loans for owner-occupied properties are regulated by the Financial Conduct Authority (FCA), providing an extra layer of consumer protection.
How Bridging Finance Can Help with Unmortgageable Properties
Bridging finance opens up possibilities for properties that traditional lenders won’t consider.
Here’s how it can help:
Swift Access to Funds: When a property opportunity arises, speed can be essential. Bridging loans can be arranged in days, not weeks or months.
Renovation Potential: Bridging finance allows you to purchase and renovate an unmortgageable property, increasing its value and making it eligible for traditional mortgage refinancing.
Time to Address Issues: A bridging loan can give you the breathing space to tackle the issues making a property unmortgageable, whether that’s extending a short lease or fixing structural problems.
Investment Opportunities: For investors, bridging finance can provide the means to quickly acquire and improve properties, capitalising on market opportunities.
Consider this real-world example
A property investor in South London spotted a Victorian terrace house at auction.
The property had severe damp issues and an outdated electrical system, making it unmortgageable. Using a bridging loan, the investor purchased the property for £220,000 and spent £50,000 on renovations. Six months later, the property was valued at £320,000 and qualified for a traditional buy-to-let mortgage, allowing the investor to repay the bridging loan and retain a valuable rental property.
Types of Bridging Loans for Unmortgageable Properties
Bridging finance comes in various forms, each suited to different scenarios:
Closed vs Open Bridging Loans: A closed loan has a fixed repayment date, often tied to a specific event like the sale of another property. Open loans offer more flexibility but come with higher interest rates.
First Charge vs Second Charge Loans: A first charge loan is the primary loan secured against a property. A second charge loan is taken out in addition to an existing mortgage.
Light vs Heavy Refurbishment Loans: Light refurbishment loans cover cosmetic improvements, while heavy refurbishment loans fund major structural work.
Your choice will depend on your specific circumstances and plans for the property. A specialist broker can help you explore these options and find the best fit for your needs.
Exit Strategies: Paying Back Your Bridging Loan
When assessing a new application, bridging lenders are most interested in two things:
- The property: The asset and its value are how a lender protects it’s loan and reduces risk
- The exit strategy: This is your detailed plan of how you are going to repay the bridge
Having a clear exit strategy is vital when taking out a bridging loan.
Common approaches include:
Selling the Property: If you’re planning to improve and sell the property, your exit strategy would be to sell it after renovations.
Refinancing: Once issues are resolved, you might refinance onto a traditional mortgage or a buy to let.
Using Other Assets: Some borrowers plan to repay the loan using funds from other investments or assets.
Each strategy has its advantages and disadvantages.
Selling provides a clean exit but depends on market conditions and can take. Refinancing allows you to retain the property but requires it to meet traditional lending criteria. Using other assets offers flexibility but requires careful financial planning.
Remember to consider potential tax implications, particularly if you’re selling a property that’s not your primary residence.
Let’s talk bridging loans!
Risks and Considerations
Bridging loans are extremely useful and flexible, but they are not without risks:
Higher Costs: Interest rates are higher than traditional mortgages, reflecting the increased risk and short-term nature of the loan.
Property Risk: If you can’t repay the loan, you could lose the property.
Exit Strategy Uncertainty: Your planned exit strategy might not unfold as expected due to market changes or unforeseen issues.
Unexpected Costs: Renovation projects often encounter surprises that can impact your budget and timeline.
While bridging loans are more expensive, it might be the only option for an unmortgageable property and could lead to significant gains if used strategically.
Is Bridging Finance Right for Your Unmortgageable Property?
Deciding whether to use bridging finance requires careful consideration:
Assess the property’s potential: Will addressing its issues significantly increase its value?
Evaluate your financial situation: Can you comfortably manage the costs and risks?
Are you eligible to apply?: Each lender has their own bridging loan criteria
Consider your risk tolerance: Are you prepared for the possibility that your exit strategy might not go as planned?
Seek professional advice: Consult with specialist brokers who understand the UK property market.
Remember, bridging finance is a short-term solution. It’s essential to have a clear plan for transitioning to a more sustainable long-term financial arrangement.
Bridging finance is a great option for tackling unmortgageable properties, offering flexibility and speed where traditional mortgages fall short.
However, it’s not a decision to be taken lightly.
If you’re considering bridging finance for an unmortgageable property, why not take the next step? Reach out to a Structured Property Finance Specialist who can provide personalised advice based on your unique situation.
Need some help?
If you need a short-term bridging loan then a specialist broker like us is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.
To speak with a specialist broker, please call us on 020 3556 9137
