Finbri > Case Studies > Assured lump sum pension payout secures £200,000 bridging loan for property purchase in London

Assured lump sum pension payout secures £200,000 bridging loan for property purchase in London

Finance: £200,000 | Location: Redbridge, London

When you're looking to purchase a new property, but your exit strategy is not watertight, bridging finance is not easily accessible. Usually, an exit strategy involves the sale of a property or transferring onto a mortgage, but when either isn't an option, an assured lump sum could be the answer.

A couple who ran a small business in Aldborough Hatch were due to retire within the year and were looking for somewhere to settle. They were keen to stay within the area and were on the hunt to find their ideal retirement property.

They were concerned that they could only buy their retirement property by selling their primary residence. This would be the perfect exit strategy for bridging loan applications in most ordinary circumstances. However, the couple had recently discovered their house could provide them with a stable income well into retirement, so whilst selling their property was a possibility - they wanted to explore other options.

The couple had already cashed out over £300,000 from their small business but needed additional funds of £200,000 in the form of a bridge loan to provide them with a £500,000 budget for their new retirement property.

A bridging loan was possible, but a feasible exit strategy proved cumbersome

With their minds set on having a short-term rental, the couple initially thought about selling their primary residence and buying a smaller property to convert into a short-term rental while still being able to buy a smaller retirement property. With their home worth £600,000, they considered buying two properties worth £250,000 each. Still, with no detached houses sold in Redbridge in 2022 and only three semi-detached houses in that price range, they knew this wasn't viable or the most innovative option available.

The couple also completed an evaluation of their residence and realised that if they were to keep the property and rent it out, they could be looking at a rental income of around £1,500-£1,800 per month. During 2022, 2,121 properties were sold in Redbridge (Data source: HM Land Registry), whereas the private rental sector grew from 24% in 2011 to 36% in 2022, with an estimated 39,848 homes rented across the London Borough.

With the couple soon to be retiring, they knew that renting their primary residence after buying their new property was feasible and would provide them with a comfortable living.

Another option they considered was securing the loan against their unencumbered primary residence and then transferring it to a BTL mortgage. But, due to their age, this would have been difficult, and it also would not have been something the couple would have wanted to take on in their later years, even if it was.

Armed with this information, they knew that they didn't want to sell, and after much research and correspondence with one of our representatives,  another option was identified as an exit strategy: their pension. 

How did the couple use their pension as an exit strategy to finalise the bridging loan application?

When talking to the couple, our team realised they could potentially secure their new property with an assured lump sum in the form of a pension.

After reviewing their paperwork, the gentleman's pension was due to be released within ten months and was worth £800,000 before tax. 

By securing the bridging loan against the new property purchase and then using the pension as an exit strategy, we were able to provide the couple with the £200,000 they needed to purchase their retirement property and also keep their primary residence for when they were ready to convert into a short term rental. 

How can an assured lump sum help secure bridging finance in London?

An assured lump sum can be used as an exit strategy when taking out a bridging loan. In this case, the borrower plans to repay the bridging loan using the lump sum they expect to receive later. Just like this scenario, the lump sum could be from a pension, or some other examples could include:

• Inheritance: If the borrower is due to receive an inheritance, they can use this as an assured lump sum to repay the bridging loan.
• Investments: If the borrower has assets due to maturity or generating significant returns, they can use these as an assured lump sum to repay the bridging loan.
• Bonuses: If the borrower is due to receive a bonus from their employer, they can use this as an assured lump sum to repay the bridging loan.
• Lawsuit settlements: If the borrower is due to receive a settlement from a lawsuit, they can use this as an assured lump sum to repay the bridging loan.

How does an assured lump sum work when settling a bridging loan?

The process of settling a bridging loan using an assured lump sum is relatively straightforward. The borrower has already arranged for an assured lump sum to be received later, which is used to pay off the outstanding balance of the bridging loan.

Here's an example:

Suppose a borrower wants to purchase a property at an auction for £300,000 but they do not have sufficient funds to complete the purchase. They have, however, already agreed a sale of their business investments in six months for £500,000.

To complete the new property purchase, the borrower decides to take out a six-month bridging loan of £300,000, secured against their existing property. The interest rate on the bridging loan is 1% per month rolled-up, and the lender charges a 2% arrangement fee and there is also a broker fee of 2%.

The borrower intends to repay the bridging loan by selling their business investments, providing an assured lump sum of £500,000.

In this scenario, the borrower would pay interest on the bridging loan for six months at a rate of 1% per month, including fees that amounted to £33,333. 

At the end of the six-month term, the borrower sells their business investments for £500,000, and they use this money to settle the bridging loan in full, along with the accrued interest and arrangement fee. After paying off the loan and fees, the borrower has £166,667 left over.

In this example, the assured lump sum exit strategy allowed the borrower to complete the purchase of a new property with the help of a bridging loan, knowing that they had a predetermined source of funds to repay the loan in full.

It's important to note that using an assured lump sum as an exit strategy requires careful planning and consideration. The borrower should have a solid plan in place for how they will use the lump sum to repay the bridging loan, and they should ensure that they can cover the interest payments on the loan until the lump sum is received. Seeking professional advice from a qualified financial advisor or bridging loan broker can help determine the best exit strategy for a particular situation.