Bridging the gap
In the past, rates for bridging finance were relatively high, and it was dominated by high-net-worth individuals looking for short-term finance to bridge the gap between buying a new property and selling another. For everyone else, it was high risk and best avoided. However, the sector has changed.
Over the past ten years, lending in the bridging sector has more than tripled, dozens of new lenders have joined the market and bridging finance is now a far more widely accepted and reputable source of short-term funding. Rates have dropped considerably and are now a little higher than a personal loan. The days when rates looked more like those on a credit card are well and truly over.
But when should it be used?
Bridging finance is secured (usually on a first or second charge basis) on residential, commercial and semi-commercial property as well as land. Kit Thompson, director of short term and development finance at Brightstar Financial, says: “It can be used for a range of purposes and is typically known as a solution to help clients who need to complete on a purchase before their existing property has been sold.
“Bridging could also be used for clients purchasing a property under market value who require a quick completion, clients who want to downsize and release equity in their property to allow them to complete the new property purchase prior to the sale of their existing property, and clients who are looking to release equity for cash flow purposes on a short-term basis, for example to pay a tax bill, divorce settlement or for business use.”
However, Jonathan Sealey, CEO, Hope Capital says that the biggest growth for the group has been in the number of borrowers that are small to medium size enterprises. He says: “They are increasingly using bridging to fund business expansion, release working capital, fund refurbishment projects and conversions and to buy land at auction, while developers are now using bridging to fund new developments, and for everything from a light refurbishment before letting a property, to major renovations and change of use schemes, to name just a few.” Brightstar agrees that there has been particular growth in demand for refurbishment finance recently as landlords look for ways to derive more value from a property investment.
The major advantage of bridging compared to other types of short-term lending, such as an unsecured personal loan, is the amount that can be borrowed, typically from £100,00 to £10m, the speed at which a bridging loan can be assessed and completed and the flexibility. Sealey says bridging lenders can be considerably more flexible with regards to the type and condition of the property and how it will be used: “For example, properties that are in need of refurbishment, in need of renovation, or an unusual property type like a graded building, timber-framed houses or prefabs, commercial, mixed-use, residential properties or land can all be considered acceptable security by a bridging lender. Even those deemed to be ‘unmortgageable’ by a mainstream lender.
“The purpose of the loan, the type of borrower, whether they are a sole trader, a Partnership, LLP, limited company or a Trust, can all be catered for. Credit history is also a consideration as bridging finance lenders will often consider borrowers who have a perfect or imperfect credit rating. In many instances, the bridging loan can allow the borrower to add the interest that is being charged to their loan, rather than making monthly payments, which allows the borrower to have a greater cash flow to complete their project.
“In terms of speed; generally, it will take at least a month and often 6—8 weeks to get a standard mortgage or remortgage in place. Bridging finance can be turned around in as little as 48 hours and typically offer terms of between a month and a year.”
Nevertheless, there is no getting round the fact that bridging finance is more expensive and needs to be handled with care. Liz Syms, CEO of Connect for Intermediaries says borrowers need to pay attention to their lender: “In the main, lenders fall into 2 types, the lenders that compete on rate, and the lenders that compete on service. Those that compete on rate will often apply a higher level of diligence to the overall application – they will want to understand the applicant’s full credit and income profile, to be able to offer the best rates, which can start at sub 0.5% per month in the current market. Lenders competing on service, in general, are more concerned about underwriting the property rather than the applicants. This can speed up the process, but the price will be a bit higher to reflect the risk. So the first question investors should consider is how quickly they need to arrange the loan and if they are willing to compromise on the rate a bit to achieve speed.”
There are other, less fundamental differences between lenders. For example, some lenders will consider applicants that are non-UK resident and others won’t. Some will consider other areas such as adverse credit, refinance of another bridge lender, refurbishments and developments and others won’t. Beyond the standard interest, rates and arrangement fees, which are common with most bridging finance lenders, there may also be an exit fee or extension fee that needs to be considered in the overall costs of the loan. Good bridging finance lenders should be transparent about their approach and explain all of the fees from the outset.
The most important thing to remember when taking out bridging finance is that borrowers need to have an exit strategy in place with a clear plan of how they are going to repay the loan. The two key exit routes from a bridging loan are either to sell the property or to refinance onto a longer-term deal. Sealey says that good bridging lenders will not consider a bridging loan when there isn’t a strong, clear exit strategy in place. Potential delays to the exit strategy (usually because the project takes longer than planned) need to be considered, along with the potential to extend the bridging finance.
In finding the right option, it can be good to have a specialist broker in place. If the exit strategy is refinance, a good broker will be working on the long-term deal as soon as the bridging loan completes, or even before. They would stay involved as things change. If the market suddenly drops and the borrower is not able to sell the property for as much as they thought they would, they will have already considered and worked on a plan B such as a refinance. They will be able to weigh up interest rates, fees and all other charges as well as flexibility, speed and how good that lender is in terms of communication and customer service.
In general, assessment criteria for a bridging loan is much more individual than with mainstream lending, however it will also differ between bridging lenders. Some will consider any property type or land, such as buy to lets, residential property, commercial or mixed use. They may also consider lending on properties seen as ‘unmortgageable’ by mainstream lenders, for example, buy to let properties that do not meet EPC standards, properties and land bought at auction, properties that are in need of repair, in need of renovation, or non-standard construction properties. They may also be willing to lend to borrowers with imperfect credit histories.
Bridging loans are an important option for borrowers looking to meet a short-term gap in funding. The industry has come a long way in recent years and is notable more professional today. Nevertheless, it remains a relatively expensive option, so borrowers need to do their homework.