One of the strategies that has gained popularity in recent years is buying properties below their true market value (BMV) and using bridging loans to finance the purchase and renovation.

But what are below market value bridging loans and why are they so attractive to property professionals? In this article, we will explain the concept of BMV bridging finance, how it works, and what are the benefits and challenges of using it.

What are below-market value bridging loans?

A below-market value bridging loan is a type of short-term finance that allows the borrower to purchase a property at a discounted price and use the property’s open market value (OMV) as the basis for the loan-to-value (LTV) calculation. This means that the borrower can potentially borrow more than the purchase price and cover the costs of refurbishment, legal fees, stamp duty, and other expenses.

For example, suppose a property is worth £250,000 but is being sold for £175,000 due to the seller requiring a quick sale or due to a change in the seller’s circumstances. A BMV bridging lender may be willing to lend up to 65% of the OMV, which is £162,500 in this case. This means that the borrower can cover up to 92% of the purchase price with a BMV bridging loan.

An alternative and much more readily available option is to offer additional security over a property that you already own, this can allow borrowing up to 100% of the purchase price along with associated purchase costs and refurbishment costs of a property development project.

A BMV bridging loan is usually repaid within 12 months, either by selling the property at a profit or by refinancing to a long-term mortgage. The interest rate and fees for a BMV bridging loan are typically higher than a conventional mortgage, but the borrower can save money by paying off the loan quickly and avoiding early repayment charges.

A similar type of strategy can be used for larger scale property development projects where in certain circumstances up to 100% of the property or land purchase price can be borrowed followed by stage payments for the build or refurbishment costs.

What are the benefits of below-market value bridging loans?

There are several advantages of using BMV bridging finance for property investment, such as:

  • Access to more opportunities: Buying properties below their market value can be a great way to find bargains and increase the return on investment. However, these opportunities are often limited and require fast completion, which can be difficult to achieve with traditional lenders. BMV bridging loans can provide quick and flexible funding for these deals, allowing the borrower to secure the property before someone else does.
  • Higher leverage: By using the OMV as the basis for the LTV calculation, BMV bridging loans can offer higher leverage than conventional mortgages, which are usually based on the purchase price. This means that the borrower can borrow more money with less deposit and equity, and use the extra funds to improve the property or invest in other projects.
  • Lower risk: Buying properties below their market value can also reduce the risk of negative equity, which occurs when the property value falls below the outstanding loan amount. By purchasing the property at a discount, the borrower creates a buffer between the loan and the market value, which can protect them from market fluctuations and potential losses.

What are the challenges of below-market value bridging loans?

Despite the benefits, BMV bridging finance also comes with some challenges and risks, such as:

  • Finding genuine BMV deals: As mentioned earlier, finding properties that are genuinely sold below their market value can be challenging, as most sellers would prefer to get the best price possible for their assets. Therefore, the borrower needs to do thorough research and due diligence to verify the property’s condition, location, and valuation, and to avoid scams and frauds.
  • Getting accurate valuations: Another challenge is getting an accurate and reliable valuation of the property’s OMV, which is crucial for determining the LTV and the loan amount. The valuation is usually done by a RICS surveyor appointed by the lender, who will inspect the property and compare it with similar properties in the area. However, the surveyor’s opinion may differ from the borrower’s or the seller’s, and the lender may not agree with the valuation. Therefore, the borrower should always have a contingency plan in case the valuation comes lower than expected or the loan is declined.
  • Repaying the loan on time: The most important challenge is repaying the BMV bridging loan on time, as failing to do so can result in high-interest charges, penalties, and even repossession of the property. The borrower needs to have a clear and realistic exit strategy, whether it is selling the property or refinancing to a mortgage, and be prepared for any delays or difficulties that may arise in the process.

How to Apply for a Below-Market Value Bridging Loan?

Most bridging lenders generally require applicants to submit their applications through an experienced commercial finance broker, with over 30 years of experience, being based in Scotland and covering the whole of the UK we are ideally positioned to guide you through the application process.

Conclusion

Below-market value bridging loans are a popular and effective way of financing property purchases at a discount and maximising the return on investment. However, they also involve some challenges and risks that need to be carefully considered and managed. Therefore, the borrower should always seek professional advice and compare different options before applying for a BMV bridging loan.