Different strokes for different folks

Angela Faherty

January 12, 2008

As a description for a property, the word ‘interesting’ can often be a euphemism for ‘needs loads of work done to make it habitable’.

It could also refer to a property that needs finance for a change of use – for example, a commercial or agricultural property for conversion into a house, the conversion of a building from residential to commercial use, or it could cover part-commercial premises such as a retail unit or workshop with a flat above.

‘Interesting’, when applied to a property that is being proposed as security for a mortgage loan can also be loaded with another meaning that is more negative – i.e. that a long-term lender, which is expecting regular mortgage payments from day one, is highly unlikely to consider such properties as suitable security for one of their loans.

Looking on the positive side, ‘interesting’ properties can provide brokers with additional income – as long as they have the knowledge and desire to seek an effective solution for the client.

In the current climate, when it is being reported that 30 per cent of volume has disappeared from the residential mortgage market, all broker firms must surely be looking for ways to diversify into new areas to boost their flagging income – so the capability to think creatively about interesting properties should prove to be a valuable asset.

Short-term or bridging finance has the potential to provide the solution in the majority of cases. However, brokers need to make the effort to understand its problem-solving potential, and how it can create opportunities to help their clients.

First steps

The first step in this learning process is to get rid of the old image of bridging finance as just a product that allows borrowers to buy a new property before they have sold the existing one.

True, short-term finance can be used to provide such a bridge, but it has many more uses, and it is particularly useful for clients who need finance secured on a property that long-term lenders are not willing or able to accept as security. Here are some examples of real cases which show how versatile and useful short-term and bridging finance can be for brokers faced with unusual properties – both residential and commercial – that need to be mortgaged.

The first example is a farm incorporating an equestrian centre, where the proprietors owned the property outright. They wanted to buy another farm in a different location, and had seen exactly what they wanted, but did not have a purchaser for their existing property and business.

They needed finance for the new venture, but also the breathing space to wait for the right buyer for their existing property who would offer the best price. Unlike other sorts of commercial property, such as a factory or retail unit, it is not easy to change the use of farms, so the ability to wait for the right buyer is vital to secure the optimum selling price.

The clients could have mortgaged either property, but they did not need a conventional 25-year deal because the proceeds from the existing property would be sufficient to purchase the new property outright – once the right buyer was found. Long-term commercial loans can often include initial tie-in periods with redemption penalties, and in any case lenders will be looking for regular business income to cover the regular repayments.

During the transition period, while the new riding centre was being built up as a business, this regular income stream could not be guaranteed. On the other hand, a bridging loan is designed to run for a short period and the interest can be rolled up into the redemption figure, so regular payments are not necessary. We were able to advance what the borrowers needed so that they were able to buy the property they wanted and get the best price for the old one. The bridging loan was redeemed from the proceeds of the sale.

Further examples

Next, here are some examples involving hotels and guest houses. The first is a borrower who owned a hotel and wanted finance to refurbish it to a high standard before selling it. A long-term commercial mortgage was unsuitable for all the same reasons as in the first example, whereas a bridging loan could provide the right amount of funds for exactly the amount of time needed and no longer. Interest can be charged on a daily basis and, with the absence of redemption charges, this was the best option for a project that was designed to add value to the property in a short space of time. It should also be noted that short term and bridging finance can cater for longer term development projects by making payments in tranches. In other words, each time the property increases in value as another phase of development is completed, the bridging finance lender can advance a further amount of funds, up to the agreed loan-to-value.

Looking at properties undergoing a change of use, we can look at two cases involving guest houses. In the first, a family wanted to buy a seven bedroom guest house and turn it into a luxury detached residential property. The broker could not, in the first instance, source a residential mortgage, because it was a commercial property, not a house. On the other hand, a commercial mortgage was out of the question, because there was no business being done that would create income to make the regular mortgage payments. The lender could front what was needed in the short term, being confident that the loan would be redeemed when the borrowers obtained a long-term loan from a residential lender once the conversion was complete. Turning this back to front, the conversion of three houses into a large guest house could also be financed, with the loan being redeemed by remortgaging to a commercial lender once the guest house business was established.

Providing the best solution

My last example is of an increasingly frequent scenario, which is the owner of a property with a large garden gaining planning permission to build a house on part of the garden and needing the finance to build the new property. A bridging loan could be structured by taking a second charge on the existing property and using the value of the land making up the new building plot.

These are just a few examples of the many ways that short-term and briding finance propositions can provide the best solution for unusual and potentially problematic mortgage cases. Wherever the client needs finance quickly, and has property with equity in it, then a solution can normally be found. With the potential to earn two fees – one for introducing the bridging loan and one for broking the long-term mortgage arrangement – brokers need to get into the habit of thinking laterally and using the short-term and bridging option more frequently, to the benefit of all concerned.

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