Bridging Loans Bridging Finance
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What Can Bridging Loans Be Used For?

Bridging Loan Uses

Sometimes you might need to access money quickly to buy a property and you cannot wait for the lengthy process of a mortgage application or a house sale, so you look for alternative finance options. One solution could be to borrow money from someone you know but if that is not an option, the next consideration is usually to apply for a Bridging Loan.

To find out more about how we can assist you with your Bridging Finance requirements, please click here to get in touch

What is a Bridging Loan?

A Bridging Loan is a short-term finance loan that can be used for a number of different reasons. It is commonly used to buy a property while an existing property is in the process of being sold but will not go through in time for the money to be available. It could also be used when someone buys a house at auction and they do not have the time to get a mortgage as they need to pay the seller quickly.

Another reason someone might choose to apply for a bridging loan is if they want to pay for urgent renovation work while they wait for a remortgage application to go through. Bridging Loans are frequently used by Property Investors but people who are not investors can also use it if they are in a situation that requires quick finance.

Types of Bridging Loans

There are two types of Bridging Loan:

Closed Bridging Loans

Closed Bridging Loans have a fixed date for the loan to be repaid. Typically, this will be used if you have exchanged contracts and are waiting for your property sale to complete. It may be that there has been a delay that means your mortgage loan is not ready yet. With this type of bridging loan, the lender will want to know exactly how you are going to repay the loan, for example, through sale of your property.

Open Bridging Loans

With an Open Bridging Loan there is no set date for repayment but most lenders would require it to be paid within a year, as it is only ever intended to be a short term finance solution. When you take out a bridging loan, you do not have to have a specific exit plan, such as the sale of a property.

Bridging Loans will usually have higher interest rates that standard loans, due to the quick solution that they provide. They are often referred to as gap financing because they are filling the gap until another finance option is available.

Who can use Bridging Loans?

Bridging Loans can be used by individuals or by businesses, provided that they meet the required criteria. Some Bridging Loans will require the applicant to have some type of collateral as part of the loan agreement, such as property.

How Businesses use Bridging Loans

Businesses often use Bridging Loans for reasons other than buying commercial property via a Commercial Bridging Loan. They sometimes use it to cover costs such as paying tax bills while waiting for another finance solution. Some business owners use a bridging loan to purchase another business in a takeover, or they might cover the costs of a development project.

Bridge Loans for Property

In some situations, a homebuyer may need to take out a bridging loan to pay for their new property while they wait for their existing property sale to go through. If there is a delay in the sale, to avoid their purchase falling through, they can arrange bridging finance to ensure it goes through.

There are fairly strict lending criteria for this type of bridging loan use and the applicant would have to have excellent credit ratings as well as a low debt-to-income ratio. Another part of the criteria that lenders usually require is that the bridge loan is only up to 80% of the combined value of the two properties, which means that the applicant must have a large amount of equity in their property.

If the applicant does have a bridging loan approved in this type of scenario, the mortgages for the two houses are rolled together.

Property investors and Bridging Loans

Many property investors use Bridging Loans to enable them to build up their property portfolio. When they are buying property at an auction, a quick way to finance the purchase is through a bridging loan but they also use bridging finance to buy properties on the market too. Often, property investors will need property purchases to go through as quickly as possible so that they can get tenants into rented property.

Another way that property investors sometimes use Bridging Loans is if they want to buy a property and refurb it and then sell it on for a higher value than they bought it for. This process is called flipping and a short-term loan is ideal as once the property is purchased, they will spend a few months on the refurbishment and then quickly sell the property on.

Experienced property investors are usually quite likely to get approved for a bridging loan because they will have accumulated a lot of collateral in their property portfolio.

How does a Bridging Loan work?

The way that a bridging loan usually works is that a ‘charge’ is placed on your property. This ‘charge’ is a legal agreement that determines which lenders would get paid first if you were to miss payments on your loan and fall into arrears. If you own your property, then the bridging loan would be your first charge but if you still had a mortgage on your property, the loan would be a second charge.

If you are unable to make the payments on your bridging loan, your property could be sold to pay the loan back to the lender.

Is a Bridging Loan expensive?

Generally, a bridging loan will cost more than a standard mortgage because it is a short-term arrangement and the lenders will want to make enough money from the short period of interest to make it profitable for them.

The fees are usually charged on a monthly basis, rather than an annual basis due to the loans usually only running for a number of months. A monthly fee might be somewhere between 0.5% and 1.5% per month, costing considerably more over a year than an average mortgage interest rate.

When you take out a bridging loan, you will also need to consider that there will be a set-up fee for the product, which will be around 2% of the loan, which can obviously end up being a very high amount if you are taking out a large bridging loan.

How much could I borrow with a Bridging Loan?

This varies massively depending on the applicant’s financial circumstances and amount of collateral. The criteria will also differ depending on the lender but a large number of lenders will only lend up to 75% loan-to-value of the applicant’s property. In certain circumstances, if the client has sufficient equity in other properties, then a 100% bridging finance can be provided.

If you are able to take out a first charge loan, because you have no outstanding mortgage on your property, you will usually be able to borrow more than if you are taking out a second charge loan.

Is a Bridging Loan the right option for me?

A bridging loan can be the ideal solution for many people but there are disadvantages to consider too. These are the main pros and cons to be aware of:

Pros and Cons of Bridging Loans

The main Pros of taking out a Bridging Loan include:

  • Fast access to money
  • Able to borrow a large sum of money
  • Protect property chains
  • Enable projects to go-ahead which otherwise wouldn’t
  • Flexible

The main Cons of Bridging Loans are:

  • The interest rates are usually high
  • You will usually pay a large fee for the set-up of the loan
  • By securing the loan against your property, your property is at risk

When you are deciding whether a Bridging Loan is the right option for your circumstances, you should review all of the different options that are available. For example, if you are buying a new property before your existing property sells, you might be able to take out a Buy-to-Let mortgage instead.

However, if you are looking for an option that enables you to have access to money straight away, either to purchase a property, pay tax bills or pay for property renovations, then a bridging loan may be a better option.

Many property investors and property developers use Bridging Loans as a way to get started and then once they have made enough capital, they can stop using Bridging Loans to avoid paying the higher interest rates that typically come with this type of finance solution.

It is a good idea to get financial advice from an expert before you consider taking out any type of financial product. At Commercial Finance Network, as the UK’s leading Bridging Finance Broker, we can provide free expert guidance and advice on Bridging Loans and can help you to find the right type of finance to suit your needs. As a truly independent Bridging Finance Broker, we also have access to all of the UK’s Bridging Finance Lenders, so we can most certainly secure you the best deal and rates available in the market. If you are interested in any our Bridging Finance services or you want to know how our services could potentially assist in moving your project forward to the next step, speak with one of our Specialist Bridging Brokers today on 03303 112 646 or else request a callback via our Quick Enquiry form below.

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short-term lending
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What are the prospects for the short-term lending sector?

It is worth reflecting on just how far the short-term lending industry has come, not just in the past 12 months, but in the 10 years since the global financial crisis of 2007 to 2008.

Back in 2008, the world was a very different place.

As the credit crunch tightened its grip early in the year, interest rates were cut from what now seems like a positively stratospheric 5.5 per cent to 5.25 per cent.

Meanwhile the UK specialist lending sector was dominated by banks, be they high street lenders or American banks, funded largely by the securitisation model.

When the US housing bubble burst, those of us working in the industry remember very clearly just how quickly funding lines evaporated and US banks disappeared back across the Atlantic.

A large void was left. But into this space – slowly at first but then with ever greater momentum – grew a strong and vibrant specialist lending sector, underpinned by an unprecedented diversity of funding sources.

New lenders proved that they could thrive in any macroeconomic environment, many being founded and forged during a period of huge economic uncertainty.

This new breed of lender played a hugely significant role in financing the inherent dynamism of our property investors and SMEs and, in doing so, helped to ensure the UK bounced back from the financial crisis more strongly than virtually any other nation.

Arguably the worst recession in living memory, a crisis that was actually housing market-led saw UK house prices fall 13.7 per cent between 2007 and 2009. But this fall was recovered in a little over three years.

Maturity

Today, some of the first new entrants have grown and become banks themselves. They have been joined by challenger banks and peer-to-peer lenders and, in recent months, by a further surge of new lenders as family offices and private investors have widened their investment strategies in the face of volatile equity and bond markets.

This wave of liquidity and increased competition and driven rates down to levels that were unthinkable just three or four years ago while loan-to-value limits have increased, despite the backdrop of a subdued and even, in pockets, declining property market.

Total lending of more than £4bn in 2018 underlined the increasing maturity of the short-term lending market.

On the face of it these trends look like great news for borrowers and, in many instances, they are.

But despite hugely competitive borrowing rates and record employment levels the wider UK property market has finally begun to reflect concerns over the shambolic handling of Brexit as March 29 draws ever closer.

According to the Halifax, December saw annual house price growth slow to its weakest pace since February 2013 and a monthly drop of 0.7 per cent.

Faced with massive uncertainty around the eventual outcome of Brexit, it is hardly surprising that UK homeowners are increasingly sitting on their hands and waiting for the storm to pass.

Consequently, we have reached the point where a slowing property market, combined with intense competition between established specialist lenders to maintain market share and newer entrants to gain some has inevitably seen some lenders, both old and new, pushing both rates and loan-to-values to unsustainable levels in pursuit of new business.

These same lenders have often paid inadequate attention to their clients’ exit strategies.

The assumption that rising property prices would always ensure an exit by refinance have proved to be deeply flawed and default rates for these lenders have spiralled.

Against this backdrop of rising defaults and growing losses, some established lenders have lost their funding and have begun to exit the market.

Meanwhile, some newer lenders have based their underwriting strategies on algorithms and automated procedures.

This one-size-fits-all mentality simply does not work in a sector where deals are often extremely complex, requiring the sort of ‘outside of the box’ thinking and tailored solutions that only highly experienced underwriters can provide.

Rigid product offerings do not work well in the bridging space.

Holistic approach

Finally, compounding the above, due to the rapid growth of the sector, it is now often the case that relatively junior underwriters and staff are being offered positions and levels of responsibility for which they are too inexperienced and ill-equipped to cope.

Immediate contact with senior personnel is often the key to a successful outcome, but this can be impossible with some newer lenders, who just do not have the in-depth knowledge within their teams.

Now, more than ever, advisers need to take a more holistic approach when determining the lenders they deal with.

A simplistic focus on lower rates, coming as they often do in rigid, less flexible product offerings, can be a mistake.

Frankly, there is much more to making a good choice than price, particularly when the average duration of bridging loans is counted in months rather than years.

Rate and LTV should always be balanced against a multitude of other factors, including an ability to offer both conventional and unconventional solutions, access to senior decision-makers from the start of the application process until the day the loan completes, autonomy to make decisions in-house, certainty of funding and a consistent and, above all, decisive service.

Fortunately, there are many lenders with highly experienced teams and strong and diverse funding lines which were formed and have been forged in the last recession.

It is these lenders that will underpin the specialist market in 2019 and that stand ready to meet the funding needs of borrowers, be they opportunistic investors in a buyers’ market or the entrepreneurial SMEs that are the backbone of the economy.

The specialist lending market is well positioned to end 2019 stronger, leaner and fitter than ever before. But now, more than ever, it is important to make sure you are working with the right lending partners.

By Brian West, private client manager at Conrad Capital

Source: FT Adviser

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Is the short-term lending market robust enough to deal with the fallout from Brexit?

Theresa May and Jose Mourinho have more than you think in common. Both have risen to the top, both have earned and deserve respect, both have found it too difficult to deal within and too difficult to assert themselves against those with whom they must now compete. Both it would seem, have taken on impossible tasks.

So as at this week, we still don’t know whether Brexit is happening and if it is, whether it shall be soft, hard or something in between.

Most will acknowledge the outcome for the country as a whole is uncertain. The majority believe, in the short-term at least, there is likely to be disadvantageous economic consequences. I do not disagree with that view.

But that is a broad assessment. What about the short-term lending space in particular?

I believe short-term lending is better placed than most to best withstand the negative impact of Brexit, whatever its form. I say this for the following reasons:

* The short-term lending industry is one which is mostly insular. It deals in the funding of UK property mostly by UK lenders, mostly with UK funding lines. Unlike automotive manufacturers, lenders do not cross borders to acquire carburettors from Italy or exhaust systems from Germany. For lenders and borrowers, there should be no major across the board disruption to transacting business in the immediate term.

* It is true this industry is inextricably linked to the property market. Mark Carney has talked about a 30% crash in property prices. He may be right. But is that forecast, which was wrapped in caveats and predicated on a number of events, really likely? Data captured at Brightstone Law suggests that the value of property began to drop from the date of the referendum result. The research suggests properties valued in, or around 2016, selling in today’s market are some 20 to 25% off pre-Brexit valuation. So it is plausible, that the market has already factored in some, if not all of the Brexit impact.

* This country enjoys a special advantage which is not often highlighted. The UK has the most developed, sophisticated infrastructure and systems; a reliable Land Registry; well-regulated financial services; and a legal system which is fair, transparent and impartial. That makes investing money into property in this country still appealing in safety terms, even if the transactional cost is higher than previously. With relatively cheap property prices the UK will continue to offer international buyers a sound low risk investment opportunity.

* With Brexit on the horizon and all issues flagged and signposted for some time, despite the weakening property market, short-term lending has expanded post referendum. Annual bridging completions have risen to £3.98bn, according to the latest figures from the Association of Short Term Lenders (ASTL). For the year ended 30 September 2018 annual bridging completions were up 21.2%, compared with the same period last year.

* Lessons learned from the last banking crisis will undoubtedly cause the banks and institutions to proceed with even more caution than presently – a current position where liquidity has never fully recovered and the processes put in place to avoid a repetition of 2008, continue to handcuff lending that isn’t vanilla. That toughening and increased caution may create space in other areas for specialist finance providers.

So we are all in for a rocky road. Exits will become trickier and an adverse economic climate will impact on employment and serviceability. But if there is one part of the financial services sector which is better placed to cope – it may just be this one – a sector which has shown itself in the past, able to react quickly and commercially. I certainly hope so.

Source: Mortgage Introducer

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Rise of 115% in numbers applying for a short-term loan to pay their mortgage of rent

THE number of people in the UK turning to a short-term loan to cover their rent or mortgage has more than doubled, according to new statistics.

In the past two years the number of people applying for short-term loan who said they needed help paying for their accommodation increased by 115 per cent.

New data from FCA authorised credit broker CashLady found the total number of people applying for loans has also nearly doubled since 2015, with a 93 per cent increase in volume.

As well as the number of loan applications rising, the average loan amount requested by those struggling in the UK has increased by 45 per cent from £224 in 2015 to £325 this year. The statistics from CashLady come just weeks after the Financial Conduct Authority revealed that one in six people in the UK (17 per cent) would struggle to pay their mortgage or rent if it increased by just £50.

Earlier this month, the Bank of England’s Monetary Policy Committee announced it would increase interest rates for the first time in ten years — from 0.25 per cent to 0.5 per cent.

Figures also revealed that NHS workers still top the list of employees who most require emergency financial help.

They are followed by supermarket staff from Tesco, Asda and Sainsbury’s. Struggling members of the armed forces also make up the top five workforces requesting loans.

Managing director of CashLady, Chris Hackett, said being able to keep a roof over your head is “a basic human right.”

He added: “These figures, uncomfortable as they are, lay bare the state of the nation as people are struggling to cover their rent or mortgage payments.

“Wages for some of our most valuable members of society are just not high enough for them to manage basic living costs and they are regularly being forced to seek out short-term financial help.

“Housing expenditure is the largest monthly expense for our customers and they should be able to comfortably afford this before turning to emergency finance.

“We act as a broker for short term credit to help our customers find financial assistance from FCA authorised credit providers instead of seeking out illegal or potentially dangerous alternatives.”

The CashLady figures have been released after Chancellor Philip Hammond was accused of leaving ‘ordinary’ Brits out of yesterday’s budget, by failing to mention a wage boost for public sector workers, despite claiming to “support our key public services.”

Source: The National