Although bridging loans are still mainly used by professional, more experienced property investors and landlords, they have become more mainstream in recent years given the excessive caution shown by high street lenders – and the difficulties even quality borrowers can have securing finance.
Short-term loans, or ‘bridges’, can be appropriate for plenty of borrowing scenarios, although we dealt with arguably the most classic example of bridging finance at work in July.
A portfolio investor had secured a property at auction but the high street lender the investor was intending to borrow through rejected the loan with only days left to completion because the property didn’t have a bathroom,
Despite the fact the prospective borrower had made it clear to the lender that a bathroom would be fitted immediately after completion, because the application fell outside the tramlines of conventional lending, that was it, case shut. You will probably be familiar with this scenario.
Not wanting to lose the property – and the 10% deposit placed at the auction – the investor approached Drawbridge Finance. Given the experience and quality of the borrower, we offered the required loan within two hours of it being underwritten and the funds were released within 48 hours, ensuring the purchase could go ahead.
Flexibility, rapid fund allocation and a more bespoke approach are definitely a big differentiator between a high street and specialist short-term lender. Short-term finance companies, will look far more closely at a borrower’s circumstances. Decisions do not hinge on computer-generated credit scores and inflexible criteria.
Returning to the case study, once the bathroom has been fitted and any other renovation work carried out, the borrower will refinance the property through a high street lender, settling with Drawbridge in full at the same time. Usually, the refinancing of the property takes place within a matter of weeks, at the most a few months.
In the example above, bridging finance was used when the traditional lender rejected the loan application for the property purchased at auction at the eleventh hour. However, many experienced investors at auction will buy with bridging finance from the start, knowing they can complete within the required 28 days timeframe, which many traditional lenders will often fail to meet.
An extension of one-off bridging finance like this is a drawdown facility, which acts as a pre-arranged, pre-approved limit that can be drawn down against a property or portfolio of properties. This lets investors, specifically those at auction, to move fast.
Another common use of bridging finance is in the broken residential chain, where a loan is taken out against an existing property (as long as it is not the borrower’s home) to allow the borrower to complete on the purchase of a new home when the buyer of the existing property pulls out. The bridge basically enables someone to purchase one property before they complete on the sale of another.
Medium-term loans
However, there are examples where short-term bridging loans of up to 12 months simply aren’t long enough. In cases like this certain specialist lenders will offer medium-term loans of up to three years.
For example, we recently lent over £1m to a first time buyer who was purchasing a buy-to-let in a sought-after area of London. A handful of high street lenders had rejected the borrower outright, as most require you to have owned a residential property before lending for an investment.
We investigated the applicant’s circumstances and, despite the fact that the situation was slightly ‘off-the-wall’, were very comfortable with this transaction as we could see where the money for the purchase was coming from. Also, the rental income for the property was very high as it was in a prime location in Central London.
The borrower will now use Drawbridge Finance for the next three years, creating a solid payment history, which allows him to refinance with a high street lender.
There are many other reasons for taking out a medium-term loan. For example, many renovation or refurbishment projects will take longer than 12 months, while in probate cases, the distribution of an estate may also take quite some time.
Role of the broker
Brokers are crucial to the short and medium-term lender – just as they are to the high street lender. It’s essential that the broker provides the lender with as much information as they need and, given the nature of bridging, often within very quick timeframes. Commission levels for the broker will again sometimes vary, but 0.5% to 1.25% is a ballpark figure, depending on the lender.
While rates will vary, lenders can charge clients between 0.99% and 1.35% per month on a ‘first charge’ bridging loan depending on LTV and loan purpose. Second charge’ loans, are charged at a higher rate due to the higher associated risk it may take on.
Although the bridging finance sector, like the conventional mortgage market, has suffered from a lack of liquidity in recent years, historically low interest rates have underpinned the sector. Also, many professional property investors and landlords to have become more active, using bridging finance to consolidate and add to their portfolios.
With more and more investors using bridging finance by the day, the market is going from strength to strength and rates and products are also becoming much more competitive. For many of your clients, bridging finance could well be the answer they are looking for.
