Bridging and short-term loans defined – Liz Syms

At a recent conference I attended, there was a healthy debate about whether the lender in question offered bridging loans or short-term loans.

Quite clearly, most of us would think, ‘well what is the difference? Are they not the same thing?’ What emerged from the debate was in fact quite a clear definition.

Need for speed

Bridging  finance has commonly been used particularly when there is a need for speed. It can be used, for example, to help the client purchase a property from auction where there is a 21-day completion deadline.

In reality though, how many ‘bridging’ lenders in the current market can deliver from start to finish in 3 weeks? There are some that can without question, but we have seen an emergence of a new type of bridging lender, who prefer to call themselves ‘short-term loan’ lenders.

Underwriting pressures

There has been significant pressure on bridge pricing which has seen rates that typically would have been around 1.5% per month a few years back, now being offered at rates as low as 0.59% per month. However, the price war and increasing regulation can affect some lenders’ appetite for risk, resulting in an increased level of underwriting requirements and a subsequent slowing of the process.

The price is right

So if the new ‘short-term loan’ lenders cannot compete on speed, what are they offering instead?

Price is definitely one area. But also, these lenders have defined a market that does not always rely on the need for speed, but is a short-term loan offered with flexible criteria to meet a specific need. For example, a client may wish to purchase a semi-commercial property in a high street location and convert the retail into residential using permitted development rights.

Rather than raise more expensive bridging finance for the development, he could instead raise very low cost funds from a short-term loan lender but secured against an existing unencumbered property.

Once the development is complete, the units could be refinanced to standard buy-to-let mortgages and the short-term loan repaid.

Know your client

The challenge for brokers is to understand exactly what their client’s requirements are. Is the client looking for the lowest cost funding, however long it takes to arrange, or do they have the need for speed? The answer to this question should hopefully help brokers select the right lender for their client.