Mind the exit: Lessons for brokers from a bridge gone wrong – Mehta

It’s not an overdramatic statement to say exits from short-term loans are increasingly fraught with danger.

But first we have to set the scene: bridging is a solutions product and the main reasons for its use are chain breaks, investment or auction purchase, which may include building work, heavy refurbishment, refinance or – as has become more prevalent – rebridging.

All of these uses have one common thread: trying to accurately predict a set timescale for when a purchase or works will be completed is often based on fiction, not fact.

Bridging basics: When a short-term loan makes sense

So the plot so far: a property investor or developer, potentially with or without a brokers’ advice, has done their research and they require short-term finance. And this is where the story gets interesting.

Sponsored

One Year On: Helping You Add Value with Halifax’s Green Living Reward

Sponsored by Halifax Intermediaries

To bridge or not to bridge, that has to be the opening question. A lender should first consider whether bridging is the right product for the application, or whether term finance is a better solution.

And if a joint decision is made to proceed, the next major consideration is the length of the bridge – which are available up to two years.

In the financial world, 18-24 months is still classed as short term, and bridging should only have been taken if it works for the project over that period.

Over the last 12 months, there has been a rise in products with terms of only 3-6 months. There’s short, and then there’s truly short. This is designed to play into customers’ perceptions that bridging is expensive and needs a quick exit.

And with so many factors at play that can delay a project, something that is amplified when time frames are unrealistically short, we have the true enemy of the applicant: the exit.

The exit dilemma: How timing and terms can derail deals

The nemesis of the bridging market, the exit – usually encompassing a raft of small print – is where the unforeseen plot twists suddenly come to the fore.

There are lenders within the market who, one day after going over term, will have no hesitation in immediately placing their client onto default rates while subsequently hitting them with fees and penalties. These numbers can be eye-watering in relation to the original loan amount.

Did the lender take proactive steps to engage the client on the exit penalties at the outset and re-engage before the end of the loan term? Some do, some don’t.

So we have triple jeopardy: was bridging needed, was the term time best advised, and were the exit and penalties understood by the applicant before drawdown?

Securing a successful bridge: Relationships and planning matter

Every bridging application is like a good story; it should have a well-thought-out and achievable beginning, middle and end.

I am strongly of the opinion that bridging is not a rate-only industry; every element is of equal importance, and a successful bridge works on all these factors being understood at the outset.

This is why relationships hold the key to the successful conclusion of any bridge; they are the route to a happy ending.