The good and bad of re-bridging
Jonathan Sealey is chief executive of Hope Capital
There is a growing murmur of conversation around the subject of re-bridging.
Most commentators seem to feel that re-bridging is not only bad but irresponsible and concern is therefore starting to be expressed that the market for re-bridging is growing, although there are no numbers to back this up.
So are the commentators right to be worried?
It is true that re-bridging can be a dangerous game. The absolute key for any bridging loan should be that there is a clear exit route. Usually this is through sale of the property or the transference to long-term finance. The latter route is usually taken because a property has been refurbished and is now ready to be used as buy-to-let, residential or commercial and therefore it is in an appropriate state to have a longer term mortgage.
Sometimes, for whatever reason, the borrower can neither sell nor remortgage in time to pay off their bridging loan and so is likely to look for a re-bridge. This is not always a bad thing.
Occasionally, a developer for example, will need a bit more time. The work has taken a longer than planned, a few unforeseen things have arisen, so for one reason or another they cannot pay their loan back in the original term. Some bridging lenders will then extend the loan term, while others will stick to it, invoking a penalty clause, usually incurring some pretty hefty interest rates. In this case the borrower is very likely going to want to re-bridge. Often this will make perfect sense.
If the property has increased in value and now has a higher residual worth, the work is well underway, being completed by an experienced developer and it is clear that it can be finished within a set period, then it makes sense for a new lender to provide another bridging loan. The lender needs to know however that if something goes wrong and they do need to repossess that they will make their money back, that is of course the prudent thing to do.
Where re-bridging is a less than sensible thing to do is when nothing has changed on the property. If it hasn’t progressed, there has been no change in value and the borrower does not have a clear exit plan then it becomes a fool’s game. Where it is worse is when the same property has been re-bridged with different lenders a number of times as the borrower has no other option. In these cases, the fees will be mounting up, the interest rates are likely to be getting higher and sooner or later it is likely to go pop. If the property could not be sold by the borrower with enough money to cover the loan, it is unlikely that the lender will be able to sell it for any more.
We at Hope Capital have seen this happen. We have had loans that we have rejected come back to us two years’ later, where the borrower has just done the rounds of different lenders and is in no different place than they were at the outset.
So, not all re-bridging is bad, ultimately the lender needs to be comfortable that the value has gone up and there is a realistic chance of selling the property at a profit should they have to repossess, or that, better still, the borrower or developer is going to finish the work that they have started on it, increasing the value still further.
Re-bridging a property that has not moved on and has no likelihood of doing so is a fool’s game and commentators should be rightly concerned of any increase in this sort of bridging, because as soon as market conditions become less favourable, a few lenders could well end up in a sticky situation, reminiscent on the sub-prime fiasco after house prices dropped.