To navigate the myriad of options, brokers need to understand why their client needs a bridge and the different types of finance on offer which can provide a solution.
In the first of our two part ‘How to’ series we look at product types and regulated bridging. Click HERE to jump to the regulated bridging section.
Bridging the gap from A to B
This is bridging in its most straightforward form, literally providing a bridge from one transaction to another because the timing of a property sale doesn’t line up with a purchase.
Clients with a good credit profile, who can prove they have a buyer lined up for their property, will be able to secure a bridge to purchase their new home at some of the lowest rates on the market.
Loan-to-values (LTVs) will typically be around 40%, there will be no development aspect to the new property and the term will between six and 12 months, 18 months at an absolute push.
A client may not have a pre-arranged exit route because the property has structural issues or planning permissions have yet to be approved. These factors which will act as a deterrent to other lenders agreeing to ‘take out’ the bridge at the end of the term.
Mel Fordham, director of brokerage Centrado, said: “Where there is no defined date of redemption the borrower will need an open-ended bridging loan. These are more expensive because of the risk involved in not having an exit route.”
These products have a simple structure. The client pays back the loan on a monthly basis and LTVs run up to around 50%.
Fordham said: “The client will be working towards correcting the issue which currently makes the property difficult to sell on the open market but he doesn’t know how long it will take to make the property more palatable for a mainstream lender.”
Anything in between
A whole host of facilities sit in between these two polar points of the market. Development finance is one option, where tranches of the money are released throughout various stages of the build.
Some lenders will consider a loan from ‘the ground up’ whereas others will only consider a deal when a structure is watertight.
Light refurbishment products allow investors to purchase properties which may be in poor repair, do them up, then remortgage to a buy-to-let product within three months.
Other lenders choose to specialise in derelict properties, which may need converting from commercial to residential use.
Bridging can used to buy properties at auction which may not have a kitchen and bathroom, making them instantly unmortgagable, and the speed of the loan decision matches the urgency of the bidding process.
All these products will be priced depending on their risk but all need a well thought-out exit strategy.
Don’t fall foul of regulation
Some bridging loans are regulated if they meet the conditions of a regulated mortgage contract. Here’s a recap;
– The loan must be made to an individual or trustee, not a company
– The loan must take a first legal charge over the property
– At least 40% of the property must be used, or is intended to be used, as or in connection with a dwelling by the borrower or trustee or by a person who is in relation to the borrower or trustee. This can be a spouse or civil partner, parent, brother, sister, child, grandparent or grandchild
When the bridging loan is regulated, proof of income and affordability must be evidenced and retained. Even if the product chosen has a roll-up option for the interest, affordability needs to be considered. A roll-up is when no monthly payments are made during the term of the loan but are added to the loan balance and repaid when the loan is redeemed.
Kit Thompson, director of bridging finance at Brightstar Financial, said: “A bridging loan is a short-term facility where the exit route is likely to be repayment by another lender. The new lender will ask for monthly payments so brokers need to assess whether the borrower will be able to afford those repayments.
“If brokers are nervous about giving advice on a regulated bridging loan they can introduce the business to a specialist bridging firm which is regulated to give advice. It will run through all the client’s options to make sure a bridging loan is the most suitable course of action.