A below market value bridging loan can be used when a property is being purchased for less than its open market value. Rather than assessing the loan solely against the discounted purchase price, some bridging lenders may consider the property’s open market value when calculating the maximum loan available.
This can be particularly useful for investors purchasing property at a genuine discount, including transactions between family members, distressed sales or other below market value purchases. Depending on the lender, valuation and circumstances, the difference between the purchase price and open market value may reduce the amount of cash the borrower needs to contribute.
Magni Finance works with bridging lenders experienced in below market value property transactions and can assess how the purchase price, open market value, loan-to-value and proposed exit strategy affect the funding available.
What Is Below Market Value Property Finance?
Below market value property finance is used when a property is purchased for less than its open market value. For example, a property may have an open market value of £1 million but be available to purchase for £800,000, creating a £200,000 difference between the purchase price and its market value.
With a standard mortgage, lending is commonly based on the lower of the purchase price or valuation. Some bridging lenders, however, may be prepared to assess a genuine below market value transaction using the property’s open market value, subject to their criteria and an acceptable valuation.
This can allow the borrower to raise a larger proportion of the purchase price than might otherwise be possible, although the amount available will depend on the lender, loan-to-value, reason for the discount and the individual transaction.
How Do Below Market Value Bridging Loans Work?
Below market value bridging loans are short-term loans used to complete property purchases where the agreed purchase price is below the property’s open market value. The lender will arrange a valuation and assess the transaction before deciding what value it is prepared to use for lending purposes.
For example, if a property has an open market value of £1 million but is being purchased for £800,000, a bridging lender willing to lend against the open market value may calculate its maximum loan using the £1 million valuation rather than solely the £800,000 purchase price. This can significantly reduce the amount of cash required from the borrower and, in some circumstances, may allow a lender to fund a very high proportion of the purchase price.
The lender will usually want to understand why the property is being sold below market value and will consider the valuation, loan-to-value, borrower, property and proposed exit strategy. Not every lender takes the same approach to below market value purchases, so lender selection can make a significant difference to the amount of funding available.
As with other bridging loans, there must normally be a credible way to repay the loan. Common exit strategies include refinancing onto a longer-term mortgage or selling the property. Interest can typically be serviced monthly or retained and repaid when the bridging loan is redeemed, depending on the lender and loan structure.
Who Can Benefit From a Below Market Value Bridging Loan?
Below market value bridging finance can be useful in a range of situations where a property is being acquired at a genuine discount to its open market value.
Property Investors – Investors may use bridging finance to secure discounted properties quickly, particularly where the transaction does not fit standard mortgage criteria or completion is required within a short timeframe.
Property Developers – Developers may purchase properties requiring refurbishment or redevelopment at a discount, with the intention of improving the property before selling or refinancing onto longer-term finance.
Auction Purchases – Bridging finance can provide the speed required to complete an auction purchase within the contractual deadline, including where the successful bid is below the property’s assessed open market value.
Family or Concessionary Purchases – A property may be sold below market value by a family member or another connected party. Some bridging lenders can consider the difference between the agreed purchase price and open market value when structuring the loan, subject to their individual criteria.
Is a Bridging Loan Cheaper Than a Mortgage?
Generally, no. Bridging loans are usually more expensive than standard mortgages because they are designed as short-term finance and typically carry higher interest rates and fees.
The advantage of bridging finance is not usually cost, but speed and flexibility. For a below market value purchase, a bridging lender may be able to consider the property’s open market value when determining the amount it is prepared to lend, whereas a standard mortgage lender may base its lending on the lower of the purchase price or valuation.
This can make bridging finance particularly useful where a discounted property needs to be secured quickly or where the transaction does not fit standard mortgage lending criteria. The borrower can then potentially refinance onto a longer-term mortgage once the purchase has completed and the lender’s requirements for refinancing have been met.
Whether bridging finance is appropriate will depend on the overall cost, the amount being borrowed and, importantly, having a clear and realistic exit strategy.
How To Apply For a Below Market Value Bridging Loan
Applying for a below market value bridging loan is similar to a standard bridging application, but the lender will pay particular attention to the purchase price, the property’s open market value and the reason it is being sold at a discount.
1. Initial Assessment
We assess the proposed purchase, including the agreed purchase price, expected open market value, required loan amount and your intended exit strategy. This allows us to identify lenders that are comfortable with below market value transactions.
2. Property Valuation
The lender will usually instruct an independent valuation to establish the property’s open market value. This is particularly important for a below market value purchase because some lenders may calculate their maximum loan against the open market value rather than solely against the lower purchase price.
3. Loan Offer
Once the lender is satisfied with the valuation and application, they can issue a formal offer setting out the loan amount, interest rate, fees and other terms. The amount available will depend on the lender’s criteria and the circumstances of the transaction.
4. Legal Process
Solicitors will complete the necessary legal work and investigate the transaction. Where a property is being purchased at a significant discount, the lender may require additional information explaining why the vendor is selling below market value.
5. Completion
Once the valuation, legal work and lender requirements have been satisfied, the bridging loan can complete and the funds are released towards the property purchase.
A specialist bridging finance broker can help identify lenders that are comfortable lending against below market value property and structure the application around the purchase price, open market value and proposed exit strategy.
Speak to Magni Finance to discuss a below market value purchase and the bridging finance options that may be available.