As brokers seek to open up new income streams by diversifying their business activity, many are looking to the commercial mortgage sector to provide these opportunities. There is already a community of experienced commercial finance brokers and commercial master brokers that typically make up the NACFB membership, and who cover other sources of business finance in addition to mortgages.
Some residential mortgage brokers have already made inroads into commercial mortgage introducing – possibly by generating the leads and then passing cases on to a commercial master broker. Some of these may have their own small “commercial and bridging” desk, as the skill sets needed for commercial and bridging loan broking are similar, and they naturally go hand in hand. Finally, there are residential mortgage brokers that are actively seeking new income streams and want to break into the commercial mortgage sector. Some brokers across all these three groups may be well aware of the application of bridging loans in residential business but they need more information about selling bridging loans successfully for commercial purposes.
Most of the leading specialist intermediary commercial mortgage lenders, who understood the broker market and catered especially for broker-introduced business, have now withdrawn from new lending due to lack of liquidity and closure of the securitisation markets. Nevertheless, there is still potential in the market for broker firms to earn worthwhile income from introducing commercial mortgages, including commercial bridging. Most large banking institutions are still offering commercial mortgages and many of these have intermediary-based divisions and pay brokers a procuration fee. Private banks and other business lenders are also still offering commercial mortgages.
It is generally accepted that dealing with large lending institutions can have its challenges, and borrowers going direct to lenders will find it even more difficult to approach them with the full range of documentation and proof required before a loan will be considered. As a result of this, most commercial mortgage seekers are happy to pay a reasonable fee in order to get the experience and knowledge that a good broker can offer – which opens up a source of income that is additional to the procuration fee paid by the lender.
Bridging – or “short term” finance – is coming to play an increasingly vital role in the process of successfully sourcing commercial mortgages from the big retail banks. This is because of their often protracted way of processing commercial mortgages – often taking six weeks or more. Larger lending institutions have processes and systems that were not designed with speed in mind, they are more bureaucratic and operate at a slower pace. Their attitude to risk has always been cautious, and it is even more so under current market conditions.
Some of the bureaucratic process is caused by the fact that banks (as with all other long term lenders) are as much concerned about the borrower’s ability to keep paying the monthly repayments as they are about the value of the security. They will therefore expect to see up to date accounts, business plans, and details of other financial commitments, in addition to the usual credit checks on the applicant/s.
If the client needs the money in a shorter space of time than the bank can deliver it, then the broker must find a source of temporary funds or the client risks losing the opportunity and the broker potentially risks losing the long term deal. Bridging finance is fundamentally lending on an asset and assessing the viability of a short term exit so it is designed to be both fast and short term, and it can be the ideal solution in these circumstances.
One of the key issues around bridging loans that mortgage brokers need to understand is the lender’s need to be confident that the borrower will redeem the bridging loan in a short time – commonly referred to as the “exit”. Bridging loans can be “open” or “closed” – but in both cases there must be an exit in place and the broker must understand the lender’s need to know what the exit is.
A closed bridge is when the exit time is known and there is no way that it can fail – it’s just a matter of time. One example is where contracts have been exchanged on a sale. For a closed bridge there is a lower risk therefore the LTV can generally be higher. An open bridge is where the lender is confident about the exit but timescale is not known. For example, the borrower may have an offer from a long term lender – however, products can be withdrawn (especially in the current market state), so the offer is not a guaranteed exit. For this reason LTVs on open bridging loans tend to be lower.
If bridging finance seems to be a good option for the client, the broker needs accurate knowledge of the timing of the long term advance of funds. For example, if the vendor has put a time limit of (say) four weeks to complete or the deal is off, the broker needs to go to the term lender and assess realistic time frames. They then need to talk to the vendor to get the true picture and, if necessary, start to arrange the bridging finance to cover the gap. It has become much more difficult for brokers introducing bridging deals to demonstrate that there is such an exit route in the current market conditions – but exit routes are still possible. One example is a situation where the long term lender will only advance the funds as a remortgage, so the broker can recommend that the purchase is made using a bridging loan which can then be redeemed virtually immediately.
To be confident about the exit plan, the short term lender will look at each deal individually. A mortgage offer from a long-term lender is better evidence than a DIP, and exchange of contracts on a sale is better than the property just being on the market. As the property market continues to stagnate, short term lenders will be looking very carefully at exit plans that depend on the sale of the commercial property. They will be asking: “What is the true value? Is the price too high?” and will expect to see a professional valuer’s estimate, plus comparable prices for similar commercial properties.
They will also look at the realistic chances of selling the property: can it be used for other purposes? How wide is its appeal to potential purchasers? Is the location up-and-coming – or in decline? Good brokers understand this and prove their strong worth in the transaction by getting together a good case for being confident of the sale or remortgage.
When considering the bridging loan option, brokers need to look at minimum loan terms, exit fees and ERCs, as these additional costs may show that the borrower would be better off using an alternative funding method. We have always believed that minimum loan terms, exit fees and ERCs are unnecessary for short term loans, and that true daily interest is also essential to ensure a fair deal for customers – especially when the term of the loan is designed to be short. This gives brokers the ability to offer transparency and fairness to customers who are, after all, going through a complex set of financial transactions and need all the help they can get.
How can brokers learn to recognise all the cases where a bridging loan can provide the answer for customers? We believe that the three key elements of a deal that has good bridging potential are that the borrower is asset rich, cash poor and time poor. In other words, they have a property that is worth a substantial amount more than they currently owe on it, they need to release that cash, and they need the money quickly, or they need to move on a property purchase quickly. It is never quite that simple – but there is a lot of help that brokers can seek from lenders, which they will be only too willing to provide. For example, we have a national network of BDMs and an in house “new business” desk – all of whom are experienced in bridging loans for commercial purposes. They welcome all questions and enquiries from brokers and are always intent on finding a solution if it is possible. With this good support, brokers can achieve success in introducing bridging loans, which will help to get the extra income flowing into their businesses.