Bridging finance has developed over the past four years as a fast, versatile and flexible short term source of funding. What started as simply a facility to ‘bridge’ the funding gap between purchase of a property and longer term finance, bridging has become the ‘maid of all work’ of the lending industry and brokers need to recognise its many uses.
On many cases I have been involved in, bridging finance has been the difference between a deal succeeding or failing.
As bridging finance is meant to be a temporary funding solution only, what all lenders will look for is a client with a clear exit strategy, so that he or she knows that when they take out a bridging loan, they know how long they need it for and how they will pay it off.
In terms of what it can be used for, I thought it might be a worth going through our top nine alternative uses for bridging.
1) Broken chain
Your client has found his/her dream home, but either has not yet sold their existing property, or perhaps the chain has broken down and he/she has lost their buyer.
Rather than waiting until they have resold their existing property and risk losing the new home, a bridging loan can be arranged to ‘bridge’ this gap and enable them to complete on the new purchase, repaying the bridging loan when the property resells.
2) Auction purchases
Another traditional use of bridging finance, which because of its speed (usually within 7 – 10 working days), enables sale completion to take place within the statutory thirty days allowed at property auctions. A 10% deposit is paid on the day of the auction, thus allowing more time to arrange longer term finance or sell on.
3) Temporary cashflow
Bridging has been used successfully as a means to access liquidity which is held as equity in property. Particularly useful for HNW clients looking to overcome short term cashflow issues.
4) Properties in need of works, renovation or refurbishment – A particularly good use of the USPs of bridging, namely speed and convenience. With a property in need of repair work in order to make it habitable (this includes kitchen, bathroom, central heating, electrical works, new windows etc), usually a conventional mortgage lender will not lend until the works have been completed (a retention).
This is where a bridge comes in. Once the work is complete, the property can either be refinanced to a conventional mortgage or sold, to repay the bridging loan.
5) Below market value purchase (discounted purchase)
A client has managed to source a property being offered at a discount from the open market value (OMV). For example, perhaps the person selling is in financial difficulty and needs to sell to avoid repossession, or perhaps they are just in a hurry to sell.
On the commercial side, there are plenty of cases of developers who have had to sell partially completed housing developments at discount because of cashflow problems.
In these circumstances, it is possible to arrange a bridging loan that is based on the OMV of the property and not the actual purchase price.
This means that the discounted purchase price can reduce the amount of cash deposit required to put in to the deal in order to complete and can be very attractive to investors and developers. The bridging loan is usually repaid via a remortgage (after six months) or sale of property.
6) Land acquisition
Access to bridging finance can allow a buyer a stronger hand in negotiation, with access to fast funds to enable him to secure a discount based on being able to complete quickly. Typically available up to 50%, but in some case as high as 65% LTV for land acquisition.
7) Revolving credit facility
Using a bridging loan allows multiple draw-downs of up to 65% LTV secured by first charge against residential property, for professional property investors looking to add to their existing BTL portfolio.
This is a facility that can be drawn down, utilised and repaid once works are complete and then reused again for the next project, without the need for new further underwriting or checks (subject to new valuation).
8) Development funding or JV funding on build-projects
This can mean that 65% of land purchase costs and then 70% of build costs can be made available (subject to full planning consent). A stage payment facility is also available with terms of up to 18 months.
In some instances a Joint Venture may be possible where our investor supplies funding to finish a project (perhaps started and client has run-out of funds and unable to finish the build). In this case, the funder takes a share of the profits on sale, based on Gross Development Value.
9) Business clients looking to acquire their rented premises (sitting tenant purchase)
If the clients have been running and operating their business from a premises where they have previously been paying rent and are looking to purchase the property from their landlord, then bridging finance can be arranged to facilitate this, much faster than conventional commercial finance.
In some instances, funding can be arranged at up to 90% of discounted purchase price (where the client is buying under market value), subject to max of 70% of open market value (OMV).