Bridging loans are often thought of as a type of emergency finance, however this no longer holds true.
Modern uses for fast finance have meant the spread of use for this type of loan is far wider, which has led to specialist areas in the market for lending in this way.
Broadly speaking, the bridging finance market is split in two. It is polarised into status lending on house purchase for residential purposes, serviced by high street banks; and non-status loans for commercial purposes are serviced by specialist lenders.
For those who consider bridging loans, they are normally thought of in the traditional sense: enabling one property to be purchased before another property has been sold and the equity is released.
In fact, the uses of bridging finance are extremely varied. Loans can, for example, be used for site purchase, self-build projects and property conversions. In the professional property investment market these loans can be used to complete purchases quickly, when property has been secured at auction. They are also commonly used to acquire property for renovation and quick resale.
Steven Dixon, associate director of Hampshire Trust, a specialist bridging loan lender, highlights another use.
He says: ‘Bridging loans can be used in distress situations, such as when a borrower needs to pay off long-term finance under a threat of repossession. Often you can take out the pressing creditor and allow yourself three to six months to dispose of a property in a controlled manner. What we wouldn’t do is lend in a situation where the borrower says they are going to turn the situation round. Provided the borrower recognises the end has arrived and that there is a need to get out by selling the asset, we would probably allow them to buy some time.’
Traditional high street lenders have remained true to the original definition of bridging loans. These loans can be split into two categories: closed and open loans. A closed loan is when the customer has exchanged contracts on both the property to be purchased and the property to be sold. An open loan is when the customer has not exchanged contracts on the property to be sold.
Not all high street lenders are willing to lend bridging funds. David Broadhead, head of mortgage intermediary sales at NatWest, which does lend for bridging purposes, explains.
‘Reasons why others may not wish to become involved possibly relate to the high set-up costs. It can often be more complex than standard borrowing and occasionally open-ended bridges can become messy. It can also put a strain on client resources if not managed properly,’ he says.
Broadhead adds: ‘NatWest has considerable experience in this market which mitigates the risk to the bank and the customer. However, the majority of our bridging loan business comes from the branch network ‘ not from the intermediary sector.’
All high street lenders are status lenders when it comes to bridging loans. The non-status market is fed by specialist lenders, and will generally assess a deal with reference to loan to value (LTV) ratios and its exit strategy. They are willing to assess a loan for most of the purposes previously mentioned.
Lawrence Brown, director of Commercial Acceptance, another specialist lender, says: ‘The clearing banks are normally status lenders and do not tend to get involved in non-status lending because they cannot operate at the necessary speeds. They have too many hurdles to overcome in the normal course of their internal regulation.’
Broadhead adds: ‘We do not see the non-status market as attractive as it is difficult to assess the true risk. However, we do not believe this is the case for self-certified lending where the customer’s credit worthiness is checked more thoroughly than in the non-status market.’
Taking the risk
Another reason may be that banks do not like speculating. Bridging loans are an open-ended transaction and banks tend to avoid uncertain risks. At the moment, the market is good for bridging: properties sell quickly and make profit. But it would not be such a good idea in a downwards market where properties were not selling, and borrowers would therefore not be as keen. In that sense, bridging finance is cyclical, and both lenders and borrowers are more inclined towards bridging in the present market conditions.
As they are status lenders, and normally only lend on house purchase, banks can lend at a rate that specialist lenders would not be able to meet. For example, Lloyds TSB presently charges bank base rate plus 2% for an open bridging loan and base rate plus 1% for a closed loan. This is in addition to an arrangement fee of 1% for an open deal and 0.5% for a closed deal.
In contrast specialist lenders’ charging methods vary. Some companies charge a set fee ‘ typically 1.3% to 2% a month. Other companies charge a two-tier rate. Commercial Acceptance, for example, charges interest at 3% above Barclays base rate a year and a monthly fee, which is lower. Companies vary in their early redemption terms and their willingness to continue the loan if the exit date is not met.
Bridging loans are not specifically regulated. For high street lenders who have, in the main, signed up to the voluntary Banking Code, bridging loans are governed by the Banking Code section 11, which covers standard lending practice. However, the rest of the market is free and has no voluntary regulation at all.
This is not likely to remain the case as bridging loans are set to be included in the Financial Services Authority’s (FSA) review of mortgage regulation, so may be subject to the new regime when it comes into force. However, the industry expects there to be exceptions to the rule.
Dixon explains: ‘I am not sure what exceptions will be allowed. Under the old CP98 rules there were to be some exceptions, but we are not sure whether that will change. There will certainly be elements of regulation because bridging loans normally involve first charge on a residential property. Clearly if you are lending on a residential property for a domestic purpose, and although it is intended to be short term, things can go wrong ‘ and then the FSA will wish to regulate.’
He adds: ‘If you have a dealer or trader doing a property up in order to sell it on, then I think that would probably be exempt because the borrower is not going to live in it. This is an issue we are looking at for the future.’
Broadhead explains NatWest’s stance: ‘We do not believe bridging loans should necessarily be covered by mortgage regulation as they are already covered by the Banking Code. That said, we are keen to understand the customer impact if they are not included and we are working with the various interested bodies as the regulatory proposals become clearer.’
In an unregulated market it is not always obvious who you are dealing with. As this is an industry not controlled by banking regulation there are some companies that purport to be prime lenders but are actually syndicated lenders, a group which has gone into business as a lender. There are not many key non-status principal lenders in the market, which begs the question why the niche mortgage companies are not involved.
Brown says: ‘Small lenders are geared up for a different sort of product. They tend look at the long-term residential market and have arrangements with their bankers to sell a specific sort of product at a certain volume which is then securitised. Bridging loans cannot be securitised, so someone needs the cash in the first place.’
There are fewer requirements for a bridging loan than for a conventional mortgage and in the non-status market lenders are working with a dealer or investor looking to raise money quickly. Niche mortgage lenders generally target customers who have credit problems, or are unable to prove their income. However, in the bridging market clients could normally get funding elsewhere, but use bridging finance for convenience and speed.
Brown thinks the term bridging finance may be inappropriate in the case of non-status lending.
He says: ‘People come to a non-status company for fast finance, so in a way it should not be called bridging ‘ speed finance would be more apt. The classic reason for bridging ‘ buying a house before selling another ‘ still happens, but is not the core section of the business anymore.’
Paul Robertson is a staff writer
There are many uses for bridging finance other than short-term home financing.
The bridging loan market is split into two markets and serviced by two different types of lender.
The sector is not regulated at the moment, but parts of it may soon come under the auspices of the FSA.