Back in 1989, the property market was about to implode and bridging finance was all the rage. Driven partly by a buoyant self-build market and property inflation, the expectation of reward for both lender and borrower smothered its sister concept ‘ risk. Then came the painful consequences ‘ 15% borrowing rates, up to 25% falls in the value of UK property and, for the bridging financee, the ultimate raised drawbridge in the form of either default or, worse still, repossession.
Learning from the past
Of all the lessons learnt by lenders from the early 1990s, it is undoubtedly the ‘bridge too far’ few who are prepared to breach the standard rules now set.
So where does that leave an adviser who has to keep their client’s fracturing property purchase intact?
Well, let us first look at the common scenarios. Your borrower has come unstuck by either their buyer failing to complete on their purchase prior to your borrower’s own acquisition; or the seller of the property your client is buying from is pushing back, perhaps indefinitely, the ultimate date of the purchase.
The latter is clearly more digestible. The consequences may involve a period of rented accommodation or staying with friends and if they have at least exchanged on their purchase there is some commitment evident on the vendor’s part. If there is a lengthy chain above them, however, it could be a while before they move in.
But the first scenario is the real bridging nightmare. Your client may have to commit on their purchase for one reason or another and run the risk that the sale of their property may become expensively protracted or, more alarmingly, fail to take place. Moreover, if their sale does proceed ‘ how do they complete on what is typically referred to as an ‘open- ended bridger’?
Many institutions regard these applications as the equivalent of lending leprosy. Few organisations touch them, but that does not necessarily mean there is no cure. In the past, when lenders ‘ or more typically clearing banks ‘ did empathise with the borrower, they did so on highly remunerative terms. The open-ended bridger incurred several pounds of flesh ‘ a typical borrowing rate of up to 5% above base (reaching almost 20% at one point), a 1% arrangement fee on application and conclusion and, in certain cases, the levying of additional security in the form of personal guarantees.
In the past, lenders may also have asked for the lodging of any available cash reserves for a period of up to six months and even a memorandum of deposit over a portfolio of tradable stocks and shares ‘ an approach which can, to some extent, be understood. Despite the returns for lenders, the repossessions that characterised this era simply made for an inconvenience factor that rendered such deals too onerous to continue with.
The next step
Thankfully, the market of the late 1990s brought with it at least six different solutions to the same problem.
First, there is the conventional bridging loan. A prominent lender in this market is Royal Bank Of Scotland (RBOS). Criteria varies from case to case, but usually lenders will not need to see expansive salary multiples so long as any existing loans, plus the bridging finance, can be serviced. Up to six months’ interest deposit can be asked for but a legal charge over both properties is not mandatory. The bank may also want their own solicitors to control the transaction.
Costs have softened since a decade ago. For example, RBOS typically looks for a minimum lending margin of 2.25% above bank base rate and in a recent case, the arrangement fee was 0.8% of the loan size ‘ of which 0.25% was payable upfront and was non-refundable ‘ although fees can increase to 1% for loans under £500,000. Advisers will usually receive a procuration fee for the introduction.
Advisers should also consider cross collateral lending when talking to clients. More lenders are now considering this, even where an open- ended bridging need arises. The lender combines the value of the two properties in the equation and even if the applicant’s income does not cover the servicing of both outstanding liabilities, quite often a sub-75% gearing profile can be enough comfort for the lender ‘ particularly if the client has exchanged. This can, however, be costly in terms of extra conveyancing and valuation costs but, in the context of getting the case through, such costs are rarely a deal breaker.
Let to buy is another common option these days. So long as the client’s unsold property can be let quickly and at an acceptable level of income, the mortgagee on the purchase will fund the client’s purchase up to 100% finance. A nil-redemption product is clearly preferred on the new finance to permit partial repayment of the advance when the let property is sold ‘ generally within three to six months. Such a repayment of capital is often conditional from the outset. The existing lender may also reserve the right to levy a commercial rate on the loan remaining on the newly let property.
Buy to let is not an ideal solution, but a solution nonetheless. If the client is, for example, trading down and buying a more modest property, then with buy-to-let finance available in places at up to 90% LTV the buyer will only need 10% of the asking price. Again, a nil-redemption product is worth looking at and the customary buy-to-let rules apply.
A commercially-minded solicitor can also be a deal saver. Often on a closed bridging scenario, the solicitor steps in to complete a purchase with their firm’s own funds in lieu of the mortgage agreed for the client, but which itself cannot be drawn down until the existing property has been sold and sale proceeds are forthcoming. Again, rewards can be reaped for advisers investing time in creating meaningful partnerships.
Finally, when it comes to bridging finance, it is important to select the right lender. In a recent case concerning an open-ended bridging scenario, one of the country’s largest lenders agreed to support the buyer applicant at a reduced loan to value of 80% on the purchase ‘ even though other underwriting criteria had been exceeded. This took the case outside the lender’s mortgage indemnity threshold. Most advisers have good relationships with particular lenders. When it comes to arranging a bridging loan, it may be a good idea to make use of them, even if their rates are not at the top of best buy tables.
So, there we have six other options for clients to consider. There is a solution to most bridging related problems.
When dealing with bridg- ing finance, advisers should consider the following points:
• Act speedily when the first signs of a bridging scenario begin to appear.
• Try to think ‘outside of the box’ with reference to the above working solutions.
• Maintain copious and comp-rehensive written records on every dialogue with the lender and client throughout.
Kevin Duffy is managing director of Hamptons International Mortgages
Although many lenders see traditional bridging loans as too risky, other, more widely available bridging finance solutions do exist.
More lenders are offering cross collateral lending ‘ where the lender considers the combined value of both properties involved in the proposed sale.
Let to buy and buy to let can act as alternatives to bridging loans. Borrowers can achieve a new income stream or temporarily buy their new home as a buy-to-let investment.