Many property investors are facing difficult financial issues as a result of the current uncertain financial climate, writes Roy Winston, Chairman at Credit & Mercantile.

If you have ever purchased a property under its market value you will have quickly discovered that mortgage lenders will usually provide finance against the purchase price or the value, whichever is the lower.

This can prove problematic, particularly if your cash is tied up and you can’t release the equity quickly enough in order to secure the purchase. Most lenders will only offer a percentage of the purchase price, so if you don’t have a sizeable deposit you could lose out on the deal altogether.

The secret to borrowing on the value of a property rather than the purchase price is to undertake a two stage process – initially obtaining a short term loan based on the value of the property, and then subsequently effecting a re-mortgage with a long-term lender.

When the subsequent remortgage is provided by a long term lender it will be purely based on the value of the property and their standard lending criteria.

Until recently, getting the benefit of a good value purchase within the borrowing market hasn’t been too much of a problem as some high street lenders have accepted a very short period of only a few days between initial purchase and re-finance. But due to the changed market conditions, this has become too high a risk for many high street lenders and as such, they have withdrawn this facility.

The period between initial purchase and re-finance is now about 24 weeks. With inexperienced investors and even first time buyers previously able to purchase without any kind of a deposit, lenders have become concerned that in the event of financial difficulty a borrow would be more likely to walk away from a property in which they had invested no real equity.

Property Market Advice: The Need for Speed

Speed is vital even in today’s property market. With house prices reportedly falling in certain areas, it is possible that some real bargains might be found, but opportunities and good deals are only achieved with the ability to source funding. The last thing you need is a delay with your property finance to hold up negotiations or the signing of a contract – which could lose you that vital deal. So, how do you go about bridging this gap in the current market conditions when many lenders are withdrawing products and tightening lending criteria?

A viable option may be to obtain a short term loan in order to obtain the funding to complete within your timescales. Then, when the property has been secured you can redeem that loan with a long term lower cost mortgage from a high-street lender.

The advantage of doing this is that the short term loan could be ready in a matter of days and allow the purchaser to borrow against value rather than purchase price. This can minimise the overall deposit that is required to secure the property if the property was bought very competitively.

In most cases a short term lender will lend on the value of the security, not the purchase price. Despite current market conditions it is still possible to borrow 100 per cent of the purchase price if the value is substantially above the purchase price. You should be able to get a decision, in principle, straight away, without any bureaucracy or lengthy credit committees.

Using short term finance offers more flexibility and if the investment is sound, with a true and realistic market value has been established, it should be possible to find the right lender who will lend on the market value of the property regardless of the underlying purchase price.

Obviously, charges will be higher on a short-term loan than for a standard long term mortgage and this may seem like an expensive option on first glance, but in reality the long term benefits of securing a property sometimes worth far more than its purchase price will outweigh the costs associated with borrowing on a short term basis.

Once a property has been purchased using a short term loan, a re-mortgage will be required enabling you to borrow against the open market value of the property. However, you have the time to look around to find the best deal in the marketplace.

In some cases the reason for a property being purchased below market value is due to refurbishment works that may be needed in order for the property to reach its full value. This could be where the investment opportunity lies. If a short term loan can be obtained, the refurbishment work might also be funded by that lender to reach the enhanced market value, after which the remortgage can take place.

Property Finance Tips: Weighing Up the Options When Considering a Short Term Lender

• Can they put together a cost effective deal quickly and definitively? – you can’t afford to waste valuable time if you want to secure that property and reap the rewards of a competitive price.

• Are they the true principal lender? – A true principal lender that will not need to sub-charge their own legal charge over the property or seek credit approval from any third parties.

• Obtaining short-term finance may also offer a more cost-effective means of re-building a credit history than a sub-prime mortgage with high ‘early exit penalties’.

• Are they credible? - A knowledgeable professional should be able to assess your proposal straight away, without any bureaucracy or lengthy credit committees. A decision in principle might be given immediately, even on your first phone call.

• Do they really understand their market? - If they decide not to lend it is possible that the investment opportunity isn’t sound.

• Beware – there are many new entrants to the bridging loan market. Do your homework to ensure you are dealing with a reputable finance house, authorised by the FSA and established for a number of years.