Could bridging loan business surge in 2019?
Andrew Turner (pictured) is chief executive at specialist finance broker Commercial Trust
A plethora of TV property programmes have over the years inspired a generation of property investors and restorers in the UK, which has given a boost to property auction houses and helped fuel an increase in bridging loan activity.
In addition, changes in buy-to-let have caused landlords to chase opportunities for better yields. Some investors have made good returns by purchasing properties at low prices and renovating them to increase the value and potentially derive attractive rental yields.
The Association of Short Term Lenders (ASTL) recently reported that bridging lending recorded a 21% increase in the 12 months to September 30th, 2018.
Buying rental property at auction
For those looking to invest in rental property at auction, there are time pressures around financing.
You must pay 10% of the property auction price on the day and settle the full amount within 28 days of the auction taking place. Some houses may offer 56 days, depending on property and auction house rules.
Securing a mortgage in that timeframe is generally impossible. Regardless of timescales, if you are purchasing a property that is uninhabitable (no functioning kitchen /bathroom), a mortgage lender generally would not extend a mortgage. This is where a bridging loan comes in.
A bridging loan is a form of short-term lending and can be arranged in much less time than a buy to let mortgage. Turnaround times are typically 28 days, although one of the lenders we work with has the ability to pay out funds from as little as two weeks from application.
This means you can go to auction with a timely means of securing the finance you need to purchase your property.
Bridging loan uses
Bridging loans are not just useful for auctions.
They can help to finance a number of scenarios such as renovation work on a property, with the aim of either selling the building for capital growth once the work has been carried out, or letting it out (when it is in a suitable condition) for rental income.
A bridging loan can also be used to purchase land for future development, or (as mentioned above) to purchase uninhabitable property.
Borrowers can usually secure bridging finance on up to 75% loan to value and, at the time of writing rates start from 0.44% (this is subject to change).
When using a bridging loan, it is vital you have a clear exit strategy – i.e. a definitive plan on how you will pay it off.
Bridging loan rates are more expensive than buy to let mortgage rates and they are charged monthly not annually. Not having a robust method of repaying the loan risks unnecessary and expensive repayments at best, which could lead to financial hardship.
No broker should ever arrange a bridging loan for you without planning the exit, and if there is no viable way to pay off the bridging loan, they should not recommend a bridging loan to you.
An exit strategy could be as simple as the intention to sell the property to pay off the loan.
It could also be that the property, once renovated, is intended to be used as a rental property. In this case, the borrower may opt to pay off the bridging loan with a buy-to-let mortgage. The property would have to be in a suitable condition to meet lender criteria and have enough equity to satisfy the lenders’ loan to value limits.
In cases where a business has taken out a bridging loan, future operating cash flows may be used to pay off the loan. However, a projection of future cash flow is not a secure exit strategy.
How commercial bridging loans can contribute to solving the housing crisis
Land availability and securing planning permission can be tricky propositions.
Yet the declining UK high street could be a viable means of helping to create living spaces.
A report from the Federation of Master Builders, in 2017, suggested that as many as 400,000 new homes could be built or created through conversions above shops.
The conversion of empty office blocks or shops into homes, could save greenfield and brownfield belts, whilst supplying much-needed homes from existing structures, saving on tools and materials by recycling buildings.
Borrowing levels on a commercial bridging loan can be available up to several million pounds and financing can be completed in two to four weeks.
On commercial property, you can borrow up to 75% loan-to-value, with most lenders averaging at 65%.
Exit strategy on a commercial bridging loan
Once again, you must have a clear exit strategy as typically any bridging loan must be redeemed within 24 months.
Your options are to refinance to a term loan, which is usually secured for three or more years for commercial lending. This suits a scenario where a building has been renovated for commercial or residential letting, and the borrower is interested in retaining the investment and generating monthly income.
Alternatively, you may look to sell the building for capital growth and pay off the outstanding loan, providing enough value has been created in the property.
As the housing crisis continues to attract concern and political debate, this section of the bridging market could be set for growth in the coming years.