Getting a mortgage turned down doesn’t mean you can’t buy your chosen property.
Many buildings that high street lenders won’t touch could still make excellent homes or investments with the right approach.
Bridging loans can offer a practical way forward when standard mortgages aren’t an option. Let’s look at how these loans work and whether they might suit your situation.
What Makes a Property Unmortgageable?
High street lenders often say no to properties that need substantial work.
A house missing its kitchen or bathroom won’t qualify for a standard mortgage, even if everything else is perfect.
The same goes for buildings with structural issues like subsidence or those built with non-standard materials – think concrete panels or timber frames rather than traditional brick and mortar.
You might also struggle with short leases. Most mortgage providers want at least 70 years left on a lease before they’ll consider lending.
Legal complications like unclear boundaries or rights of way can stop a mortgage application too.
Properties above shops or other commercial buildings often face extra scrutiny. Lenders worry about fire risks and noise, especially if the business below is a restaurant or bar.
Even perfectly sound buildings can be labelled unmortgageable if they’re in areas prone to flooding or mining subsidence.
But here’s the thing – these ‘problem’ properties often hide great potential.
That run-down Victorian house might need work, but its solid bones and period features could make it a wonderful home. The flat above the shop might offer far better value than similar properties in purely residential areas.
How Bridging Loans Work for Problem Properties
Bridging loans look at things differently.
Instead of focusing mainly on your income and credit score, lenders care more about the property’s potential value after improvements.
They’ll consider what it could be worth, not just what it’s worth now.
These loans are secured against the property, just like a mortgage. But they’re much shorter – usually running for 3 to 18 months rather than decades.
You’ll need a clear plan for repaying the loan, known as your ‘exit strategy‘. This might mean selling the property once you’ve improved it or switching to a standard mortgage when the building becomes mortgageable.
You can often borrow up to 75% of the property’s current value, sometimes more if you have additional security. The money arrives quickly – sometimes within days – letting you move fast when opportunities arise.
When to Consider a Bridging Loan
There are a few situations where bridge loans can be super useful.
Auction properties often need the speed that auction bridging finance offers. When the hammer falls, you’ll need to pay 10% immediately and the balance within 28 days – far too quick for a standard mortgage to handle.
A bridging loan lets you complete on time while you sort out long-term funding or carry out essential works.
Major renovation projects suit bridging loans well.
Say you’ve found a bargain property that needs a new roof, rewiring, and a complete interior update. Most mortgage lenders won’t touch it, but a refurbishment bridging loan could help you buy it, fix it up, and either sell it on or remortgage it once the work’s done.
Properties with unusual features or legal issues might also need bridge funding.
Perhaps you’ve found a flat with just 65 years left on the lease. A bridging loan could let you buy it and extend the lease, making it mortgageable for long-term funding.
Costs and Considerations
Bridge funding costs more than mortgages because it’s short-term and involves more risk for lenders.
You’ll pay arrangement fees and need to budget for legal costs and property valuations. Some lenders charge exit fees too.
The property needs proper insurance during the loan term. If it’s uninhabitable, you’ll need specialist cover, standard insurance policies rarely cover an empty property. Your lender will want to see detailed plans for any building work, often including quotes from contractors.
Remember to factor in all renovation costs when planning. Add a good buffer for unexpected problems – old properties often hide surprises behind their walls. Think about how you’ll cover any loan payments during the project.
Planning Your Exit Strategy
Your exit strategy is key to getting a good deal and needs careful thought.
If you plan to sell, research local property prices thoroughly. Look at actual sold prices, not just asking prices. Consider how long similar properties take to sell and whether any local developments might affect values.
If you’re planning to remortgage, talk to mortgage brokers early. They can advise whether your plans will satisfy mainstream lenders once the work’s done. You might need specific improvements to make the property acceptable to more lenders.
Always have a backup plan.
If property prices fall or projects take longer than expected, you might need to adjust your strategy. Perhaps you could rent the property out instead of selling, or look at different mortgage options.
How a Broker Helps
Property finance brokers know which lenders suit different situations.
They understand technical requirements and can match your project with the right lender first time. This saves time and avoids unnecessary applications that might affect your credit score.
Brokers often spot potential problems early and can suggest solutions. They might know lenders who specialise in your type of project or who offer better terms for your circumstances.
Alternative Options
While bridging loans work well for many projects, consider other choices too.
Development finance might suit larger renovations, especially if you need funds released in stages as work progresses. Some private lenders offer custom solutions for unusual properties.
Joint ventures with experienced developers could help if you’re new to major renovations. They bring expertise and might share costs and risks. Commercial mortgages might work for mixed-use properties, depending on the scope of your plans.
If you’re considering a bridging loan for an unmortgageable property, start by getting professional advice. Talk to brokers who understand this market and can explain your options clearly. They’ll help you weigh up different approaches and find the best way forward for your situation.
Remember that good opportunities often need quick decisions.
Having a broker lined up before you find a property means you can move fast when the right project comes along.