Q: What is bridging finance?
A: Bridging finance is simply short term finance. It is usually required until traditional forms of financing are in place or where funds are required quickly to secure a property transaction. It has many other uses like property renovations, chain breaking, auction purchases, below market value purchase, cash-flow assistance, overseas property acquisitions, meeting tax liabilities, business acquisitions etc.
Q: Is bridging finance easy to arrange?
A: Yes. The majority of times you can ring up a short term lender or simply fill out an enquiry form online. As many high street lenders are declining applications or simply taking a lot longer to make a decision, more brokers are turning to bridging finance to secure a property or drawdown on funds quickly.
Q: I’ve not recommended bridging loans before so could you tell me the most important things I can or need to do to help my client get a bridging loan?
A: In order to asses whether a loan application will fall within the bridging lender’s lending criteria, you need a realistic assessment of the value of the security property before the customer commits to the expense of a formal valuation. The reason for requiring the bridging finance must make sense. Finally the method of repaying the bridging finance must also be realistic and plausible – if it is to be by way of refinance, both you and the bridging lender must be able to show for regulatory purposes that all concerned have considered whether the customer is likely to be able to afford and obtain a remortgage.
Q: I have a client who is thinking of buying property at auction. However, as lenders seem to be taking longer and longer to sort out their mortgages, she may be interested in getting her initial finance through bridging. Do companies have a minimum length of time people can bridge for without being penalised?
A: Borrowers may repay their bridging loan at any time. Some lenders require that, if the loan is redeemed within the first month, then a minimum of the first month’s interest is payable. After the first month, interest tends to be calculated on a daily basis and most providers have no redemption penalties or exit fees.
In the past the average terms for a bridge was three or four months. As many of the traditional mortgage lenders require the borrower to have owned the property for at least six months, the average term for a bridge is now around seven months.
Q: We have received an enquiry where a client has an option to purchase an old Victorian property which has full planning permission for it to be converted into four separate flats. However, he is asset rich and cash poor and doesn’t have the cash available to buy it and then renovate it. Could he get a bridging loan for this property?
A: Many bridging lenders do not lend against properties that require structural works. However, with a client that is asset rich there is the possibility to release equity from other properties that could be used to purchase the property and help fund the conversion.
Q: A client is about to exchange on one property whilst selling another. Unfortunately her chain has been delayed but the people she is buying from are putting pressure on her to move ASAP otherwise they are talking of just taking it off the market. Would it be safe to recommend a bridging loan to her?
A: Most bridging lenders are responsible and will only lend where the take out is sensible and realistic. Each case and the customer’s circumstances are assessed individually. If the lender felt that it was realistic for the customer to be able to sell her property before the expiry of the bridging loan and that she was committed to selling within that timeframe and understood the risks of not doing so, then subject to LTV, it would indeed be safe to recommend a bridging loan.
Q: I have a client who needs to complete by the end of the week otherwise he will lose an awful lot of money. How quickly can you get a bridging loan?
A: Most bridging lenders regularly complete loans within a few days of an application being received, with some even doing it in a day! Where all parties concerned, including surveyors and solicitors pull together, then loans can be completed in a very short timeframe.
Q: Bridging lenders have lower LTVs than normal lenders. Why is this?
There are two main factors contributing to this, the fall in the capital value of property and the considerable reduction of exit routes for the bridge. House prices have increased, but exit routes are harder to come by as traditional lenders become have become picky. Cases where a high street lender has agreed an agreement in principle to lend and then change their mind at the very last minute is still common.
Commercial mortgages are still very difficult to arrange and because of this LTVs for commercial bridging finance are likely to stay low until the market improves. The HMO market is difficult as many of the high street lenders have either reduced their LTVs considerably or pulled out of the sector completely.
Having said that, LTVs are never likely to be the same as traditional lenders.
Q: How do you view a below market value purchase?
A: There are many instances where investors are picking up property as substantial discounts to their true value from distressed sellers. During the glory days when some mortgage lenders allowed same day remortgages, lending 100% of the purchase price was very common. Bridging lenders now want to see some level of commitment from the client. It is very common for borrower to just walk away from a property if it goes sour especially if they haven’t really put any of their own money in. Therefore many lenders ask for a 15% cash contribution towards the purchase price.
But brokers should be wary of very deep discounts as there could be some element of fraud taking place. A common sense approach needs to be taken. You need to ask why the vendor is selling at such a deep discount. Will the vendor not get more if just he sticks into an auction? These questions need to be raised with the client.
Q: Many bridging lenders are a target for mortgage fraud. Is this true?
A: Yes most certainly. Brokers need to be aware of the current scams and frauds being pulled off by organised criminals. Again a common sense approach needs to be taken as many criminals now change the land registry details by identity fraud. They then ultimately try to obtain a mortgage on the property without the real owner knowing what’s happening. This usually occurs in very low LTV deals where the prospective borrower has only owned the property for a couple of months. For example if the prospective borrower currently lives in a terraced house but also owns an unencumbered property which was bought only a few months back then alarm bells should be ringing. Criminals target bridging finance lenders due to the speed involved.