Bridging finance still retains a stigma of being expensive and to be used as a last resort by both a large section of the broker community and the public at large. This perception is changing as professional advisors understand the benefits of the product as it becomes increasingly recognised as a mainstream form of funding. It is simply a fast & flexible solution to short term liquidity issues.
Bridging is a product that can be employed for either reasons of time pressure or allowing for material changes in a transaction, both of which facilitate long term funding to be sanctioned or sale of a property. This is usually for a period up to 12 months. It is not a product for long term funding and ensuring that a commercially viable exit route within this time period, both in terms of financial circumstances and credit profile, is critical. Indeed, many bridging companies will ‘underwrite backwards’ from the proposed exit strategy.
Bridging is a ‘capital cost’ of funding a project and cannot be compared to long term funding rates. The same amount of due diligence will go into short term funding as long term albeit in a far shorter timeframe with bridging companies making a return over months rather than years. The costs should be viewed as a percentage of the overall profit or benefits of the client’s transaction rather than on a stand alone basis.
Utilising this niche product is vital to an understanding of when it can be applied to client’s individual circumstances and is typically used for property refurbishment, purchases requiring fast completions, buying property at auction, realising short term funds whilst property is sold or refinanced, as well as covering tax bills and probate transactions. However, the application of the product spans much wider horizons and it is the brokers’ understanding and specific individual circumstances that will facilitate bridging as a solution to clients.
Headline rates are only part of the costs of a transaction and should be treated with caution. Brokers should be assessing the overall cost of the transaction on behalf of their client. Example costs to factor into a transaction include:
- Is interest calculated daily or monthly? Your client could borrow money for a month and a day and be charged two months interest rather than only for the actual number of days that the loan is utilised.
- Are exit fees applied? They can applied as a % of the loan or as a number of months interest payments.
- Are legal costs fixed? Unexpected legal costs charged at completion can be an unwelcome surprise for clients.
- Are additional fees charged if the loan runs over the initial agreed period? If a loan agreement is for 6 months and the loan extends, is another arrangement fee payable for another 6 month term?
- Does a minimum loan period apply or early redemption penalties?
- Can interest be deducted from the gross loan advance? Defaulting on monthly interest payments could prove expensive.
These areas can far outweigh a headline low interest rate. Reading the small print is imperative. BFS provide loan illustrations at the outset of a transaction detailing all costs to ensure that brokers can make meaningful comparisons and their clients informed choices.
Rates & terms are not the only consideration in choosing a bridging lender for your client’s transaction. Service is obviously key in a time sensitive environment and the size of the loan book of the bridging company or the marketing budget is not necessarily reflective of service levels. BFS are a client rather than transaction led business, with a number of brokers arranging funding on behalf of clients on an ongoing basis rather than for an individual project. Establish relationships with a number of companies to give you and your clients’ options.
Different bridging companies operate within individual niches within the market such as geography, loan size and property types. This will affect a lenders appetite to lend on a particular transaction and an understanding of with whom to place different transactions will have a definitive impact on how quickly a loan can complete. By speaking to lenders, a broker can quickly gauge the preferred areas of operation, indeed many brokers experienced in bridging will use specific companies for specific types of client requirements. A ‘one size fits all’ approach will become less relevant as the bridging market matures.
Using established and reputable lenders, preferably members of the Association of Short Term Lenders, will give you and your client confidence that applications will be handled in a professional and timely manner by experienced underwriters. Established lenders can often be more flexible in approach as they have experience in a number of different solutions in ‘making the deal work’.
The role of the broker when presenting a case is more critical than it has ever been in the new commercial landscape in which we find ourselves. Lower loan to values & stricter underwriting criteria in the long term finance market, along with a sub – prime market that is all but non- existent, means that the more detail that can be provided at the outset of application, the faster an underwriting decision can be made. Completing application forms in full will prevent ongoing queries from the lender – extending timescales for the client. Providing additional information as requested in a timely manner will also facilitate the smooth running of a loan to completion. Be absolutely clear with regard to an exit route from the outset of the application.
When making applications, be realistic in judgement of timescales that the client will require the funds prior to redemption. The six month ownership rule as applied by the CML will mean that the property cannot be refinanced until it has been legally owned for this period, albeit that this does not apply to some commercial lenders. Assess if the client can service interest on a monthly basis and demonstrate that this is the case, or would deducting interest from the advance be more beneficial if funds are tied up in capital ?
Ensure that the client has solicitors experienced in handling bridging transactions. It is our experience that solicitors inexperienced in bridging transactions can cause significant delays in completing transactions. The client’s benefits from a transaction can be at risk if solicitors are appointed solely on the basis of cost.
Make a realistic view of the value of the security property. It is not in the client’s interest for a transaction not to proceed on a reduced valuation. An Internet search of properties in the locality can often provide an initial sense check for local comparables.
The investment property market has changed considerably within the last 2 years and the historic conventions of funding property purchases have changed in line with the new market. Where there is change there are new opportunities and the commercially aware investor is taking full opportunity of a reduction in capital values and a shortage of liquidity in the market, by funding purchases differently to maximise profits. Landlord and Investor confidence has certainly improved from 12 months ago, which has been assisted by a correction in capital values and subsequent higher rental returns and it is these opportunities that brokers can benefit as an additional income stream when adding bridging loans to the range of products available as a solutions to clients.
The reality is that the stigma of the product remains but as understanding of the product increases and its commercial viability, for how long?