Bridging and Short-Term Loans
What is it?
Short Term Loans (STL) are often known as bridging loans. They are used to cover short term needs for finance and can be used for many different purposes.
They are available for up to two years, or for as little as one month, so they can be flexible to your needs.
You can view case studies of our work for examples of where CPC Finance clients have used short term loans to build their property portfolios.
Short Term Loans have many different benefits, such as raising funds to meet sharp deadlines and their flexible options for different types of buyers.
Who are they for?
Typical uses of short term loans and briding loans include:
- Buying a property at auction – A mortgage might be too slow to arrange to meet a deadline or unsuitable for an auction purchase due to the state of the property.
- Refurbishment of a residential or business property – This can be light refurbishment work or heavy refurbishment (such converting a single residential property to an HMO) depending on the extend of works required.
- Covering a gap in a broken property purchase chain
- Development finance – The bridging loan covers the cost between buying and building on the land and getting a mortgage once the house is finished.
Short-term loans as part of B.R.R.R
B.R.R.R. stands for Buy, Refurbish, Rent, Refinance – often the initial property purchase is made using a STL.
This property investing strategy comprises of buying a property, adding value through refurbishment or renovation, renting it out and then refinancing onto a term buy-to-let mortgage to obtain funds for further investment.
Visit our B.R.R.R. Property Journey page to learn more about this process and examples of projects CPC Finance has completed with clients.
The benefits of short term loans and bridging loans include:
- Finance to meet auction/purchase deadlines
- Periods as short as 1 month
- Periods up to 2 years
- 1st or 2nd charge mortgage
- No ERCs on certain products
A recent client success: sourcing short term finance post-auction
The client attended an auction and successfully bid on a property. At the time, the client had finance pending and confirmed this after speaking with CPC Finance on the day, but this finance subsequently fell through. The client called CPC Finance in order to source new funding with only two weeks remaining before completion was due.
CPC Finance worked efficiently to successfully secure the finance and indeed the purchase completed on time.
What do I need to know about short-term loans?
Investors sometimes misunderstand short term loans and do not use them correctly. Here, we unpack three of the biggest misconceptions.
Myth 1: ‘I do not need a short-term loan, I can just use a buy-to-let mortgage while I do refurbishment works on my property.’
Some investors obtain a buy-to-let (BTL) mortgage, carry out refurbishment/conversion works, pay the early repayment charge, and then get a new mortgage. However, acting this way is committing mortgage fraud.
Lenders do not like it when you change the terms of the mortgage and using a buy-to-let mortgage to do works, changes the terms. A BTL mortgage is created on the basis that it is being let from day one with rent to cover the monthly repayment. If you do not have rental income, you are already changing the terms of the loan. Then, if you also carry out conversion or refurbishment works, this also changes the value/type of the bank’s security – i.e. the property.
You might get away with it, but eventually you will get caught, and there are significant penalties. Furthermore, this is not the way to build a long-term relationship with a lender.
We work with lenders who provide investors with a short-term loan to purchase a property and undertake refurbishment, and then follow on with a term facility once works are complete and the property is ready to rent normally at a higher valuation figure. An investor, therefore, has the potential to build a strong relationship with a lender over time and multiple loans.
Myth 2: ‘Short-term loans are too expensive.’
Short-term loans have higher interest rates than longer-term mortgages, but they are also only intended to be used for 1-24 months. They offer quick finance for specific purposes.
Short-term loans are used when the property is not generating any rental income. If the property is not generating rental income, you will not be able to get a longer-term BTL facility.
Myth 3: ‘Short-term loans are a last resort and are only used by people who have not managed to get other finance in place.’
For property investors, short-term loans can be part of well-planned portfolio growth for certain purposes. If you take out a buy-to-let mortgage and carry out improvements or refurbishments to the property used as security, there will be negative consequences (see Myth 1).
If you plan to use a short-term loan to purchase a property at auction, or to refurbish a property, this is a sign of good financial planning, and an understanding of the appropriate loan type, not a last-minute decision.
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