Increasing opportunities to use bridging finance as a short term funding vehicle are obviously welcome news for brokers who are faced with the combination of a slack property market and the shrinking availability of products. However, in order to generate revenue from bridging deals, you need to know where to find them.
Recently several bridging finance lenders have reported an increase in the number of bridging finance enquiries they’ve received during the past quarter. It is certainly true that the changing face of the credit markets and the reduced availability of funding from institutional lenders are causing businesses to seek out alternative sources of finance, with bridging being an option that is appropriate for a variety of situations. Commercial opportunities are growing rapidly as businesses look to restructure their finances or require investment funds for their business. Conditions in the residential housing market are also creating instances where bridging finance can be beneficial for home movers and property investors.
More and more finance brokers are educating themselves on the opportunities that short term funding can provide and Blemain Group is experiencing a much more diverse “purpose of loan”, providing an insight to the types of new business brokers are targeting.
Moving on up
Much has been written about the wide variety of uses for bridging finance, but there is one which is often overlooked: the one for which the product was originally developed! I refer to the use of bridging finance to allow people moving home to secure their new property before they have completed the sale on their current one – chain-breaking.
You might think that chain-breaking bridges are small potatoes in a housing market where so little activity is taking place, but a falling market is also the best time to buy for those who are willing and able to take their next step up the property ladder. The most recent statistics available from the CML show that, compared to Q4 2007, the criteria restrictions which have characterised 2008 have resulted in marginally more favourable income multiples and affordability for home movers who are still able to raise a deposit.
Nevertheless, people who wish to move house will still have one significant barrier to overcome and this is the increasing amount of time it takes to sell a property; figures from Hometrack show that the average time that a house sits on the market is now up to 9.8 weeks. These timescales can limit the bargaining power of buyers and in a worst case scenario may mean that their new home slips through their fingers altogether. A bridging loan can not only provide them with the capital they require to complete a purchase prior to the sale of their current home, but it can also be advanced within a timescale that allows them to make a competitive offer backed up with the promise of a quick completion.
A recent release from RICS notes that conditions in the residential market are stimulating interest from “Predatory Buyers”. Generally, these are property investors who are taking advantage of falling property prices and slow activity to bargain for further reductions.
Shrinking mortgage availability means that many potential property purchasers are opting to remain in rented accommodation until the market becomes more favourable. This is stimulating tenant demand and in conjunction with lower house prices, is helping to keep rental returns buoyant; an attractive combination for those with an appetite to grow their portfolio.
For these pro-active investors a popular source of bargain buys is the auction room, where increasing numbers of distressed sales are finding their way into the catalogues. However, they are also coming to the realisation that the depressed market puts them in a strong bargaining position and are pushing their advantage by making cash offers for attractive properties in the estate agent’s window.
Key to both these approaches is the ability to release equity from an existing property portfolio quickly, and bridging finance is the ideal mechanism to accomplish this. Cultivating a strong network of active residential investors could thus provide brokers with a steady stream of bridging enquiries. Brokers could also explore the possibilities of strengthening their links with local auction houses and estate agents with a view to the joint promotion of services.
The commercial route
The commercial applications of bridging finance are numerous. It is pointless to deny that some, such as the provision of funding for property developments, are currently in a decline that has been bought about by broader market conditions and the reluctance of mainstream lenders to provide an exit route. However, there are some commercial uses for bridging finance that are becoming more prominent as businesses bolster themselves against the current downturn and position themselves to capitalise on an eventual reversal in economic trends.
The most obvious of these in the current climate of timid lending criteria from the big names is short term cash flow solutions. Businesses are still looking for the finance they need to secure crucial contracts, push projects through and acquire stock or other materials. Given the current outlook their banks are less likely to advance the funds they require, but a bridging loan still retains the advantages that it can be secured on any suitable property and can be completed within the kind of rapid timescales that can help clients to get the best deals on offer. Brokers who handle commercial cases may therefore wish to consider targeting their promotional activity at those firms that could benefit from access to a quick alternative to mainstream business lending, SMEs and manufacturers being notable examples.
The other less publicised application for bridging finance is a stop-gap solution for organisations that want to refinance their long term lending. Despite the hiccups in the credit markets, reductions in interest rates mean that the cost of long term commercial borrowing is actually going down. The result is that many firms are reassessing their banking arrangements and concluding that their existing facilities may need to be restructured. Whether they decide to renegotiate with their current bank or transfer their business elsewhere, an organisation needs time to review the available options and structure out their new arrangements. It is during this period that a bridging loan can be used to give them the breathing space they require to negotiate the most favourable long term deal, and we have actually seen occasions where the banks themselves introduce the client to a suitable broker.
To benefit from the full range of bridging opportunities brokers need to establish relations with a lender who can provide products that are suitable for a variety of market sectors. Several new providers have entered the bridging market in the past 6 months, but it is generally advisable to work with established lenders that have extensive experience of bridging transactions and have streamlined their internal processes to maximise the speed and efficiency with which they can complete a deal and advance funds.
You should also ensure that you can offer a range of options with regard to repayments and length of term. Historically, 3 months has been the standard term for a bridging loan with penalties applied if the loan over-ran or was redeemed early. Nowadays bridging loans can be found with terms anywhere from one to 15 months, providing a much greater degree of flexibility. Finally, ensure that you also have access to bridging products that are not universally available such as commercial second charges; these are essential for assisting businesses that need to release equity from a property with an outstanding mortgage.
As you can see, opportunities to do bridging deals can still be found in significant numbers provided that you know the type of client to target and can make the right connections to help bring deals to fruition.