The phrase ‘cash is king’ has never been more relevant than in today’s property market, where competition for available housing and commercial stock is intense.
There is one price for those who want to purchase in the usual manner with a mortgage, and another for those able to buy within days for cash. The difference between the ‘official’ price and that which can be secured with a quick sale can be considerable. In the area of new build, builder discounts of the order of 20 per cent are not unheard of for cash buyers.
Those purchasers who offer sellers a quick cash sale are invariably not doing this with their own money. As they do not have hundreds of thousands of pounds in the bank ready and waiting, they instead raise the money by taking out a short-term specialist ‘bridging’ loan.
Time sensitive
Unlike many other forms of finance, bridging is extremely time-sensitive. Individuals want the bridging monies in their bank accounts within days, or not at all. They need to move swiftly because the purchase is time sensitive: if they cannot complete to the seller’s schedule, the preferential terms evaporate and the deal is off. This means that bridging lenders are expert at processing applications within the very short timeframes.
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To use a postal metaphor, bridging loan providers offer a Fed-Ex type of service, where the customer pays for a time-specific delivery, whereas the banks and mortgage companies provide a non time-sensitive, standard mail service.
For a bridging loan there is no extended application process. It is simply a case of utilising the applicant’s domestic or commercial property as security and, if there is sufficient equity and the redemption arrangements for the bridge make sense, the application is authorised. Typically, the bridging monies are in the borrower’s bank account within two to seven days of application.
There aren’t any lenders outside the bridging sector that can provide finance this swiftly. Even in an age of online decisions-in-principle and automated valuation models, no mortgage lender is able to ensure money is actually sitting in an individual’s bank account in this timeframe. Interest rates vary, but are typically 1.5 per cent per month, so bridging is a short-term vehicle.
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Most borrowers are not paying this rate for long and have a second phase of finance, usually a remortgage, arranged as soon as the bridging is in place. In fact, bridging should ideally be viewed as the first phase of a two-phase financial transaction.The property is secured and acquired with the bridging loan and, within a short time, this loan is redeemed, usually with a mortgage.
The bridge is sometimes even redeemed with a mortgage on the day that it is taken out, doing away with the need to pay interest over an extended period of time. To take advantage of the same-day product, the borrower must have a means to redeem the bridge in place on the same day that the bridge completes.
On the completion day in question, the bridging loan is used to buy the property and, as soon as ownership passes over, the remortgage is used to redeem the bridging loan.
The same day product is charged at a flat rate of 1 per cent of the amount borrowed plus the broker’s fee, as compared to the 1.5 per cent per month plus broker’s fee that applies to a conventional bridge where the redemption is yet to be arranged.
As mentioned above, at 1.5 per cent per month, bridging is not cheap, but it is cost-effective. If the quick purchase of a property can extract a 20 per cent discount from the vendor, the cost of the bridging loan can be dwarfed by the monetary gain.
Many and varied
The uses of bridging finance are many and varied and extend beyond the traditional ‘bridge’ to make good a ‘broken’ house purchase chain. A few examples illustrate how effectively bridging can be used by the property investor. For example, say an individual purchased a property at auction, but had a deadline to complete within 28 days.
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Although the customer’s bank agreed the finance in principle, it was unable to guarantee that the loan application would be processed within the timescale needed. The customer could not afford to lose his deposit or the property that he wanted to buy, so he obtained a bridging loan. Once he had bought the property, he remortgaged with his bank to redeem the bridging loan.
The second case concerns an investor who had the opportunity to purchase a house on a new development at a discount – provided the sale completed within two weeks. He wanted to borrow against the property’s full value, rather than its discounted purchase price. The customer contacted a number of high street banks who agreed to loans-in-principle, but none could guarantee that the loan would be in place in time and they could also only lend on the purchase price, not the value.
Due to the timescale and the fact that the customer had very little cash to help fund the purchase, he had to find a lender who could provide the finance within the two weeks, as well as lend against the property’s value.
The bridging deal completed within four working days, and the lender was able to advance the full amount, thanks to the ability to lend against the value of the property. The customer then arranged a buy-to-let remortgage that redeemed the bridging loan six weeks later.
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These two cases are fairly typical of the uses to which bridging is put, but there are others. For instance, property investors may want to create a revolving funding line against an existing property portfolio; stay in an existing house while refurbishing a new property; or borrow short-term against the value of a property, not against income multiples.
Finally, a third case involved a landlord who had the opportunity to acquire four flats valued at £550,000 for a discounted purchase price of £500,000 – as long as the deal completed within 10 days.
The introducer was already in the process of arranging long-term buy-to-let mortgages on the flats, but the long-term lender was only willing to lend at a loan-to-value based on the purchase price.
A bridging lender can utilise its experience of genuine discounts to professionally assess the risk and provide bridging finance based on the value of the properties. This would provide most of the purchase price, with the client needing only a relatively small amount to cover the balance and attendant costs.
As the broker was able to provide unconditional and irrevocable remortgage offer letters from the long-term lender, we were able to lend 80 per cent of the value of the flats. Valuations for the buy-to-let mortgages were already in place and performed by surveyors on our panel, so we were able to accept a re-type and save the client further expense.
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The loan was only in place for the minimum one-month term, with interest charged at 1.45 per cent. The client was able to remortgage the properties one month later; this time allowing the remortgage to be based on the value of the properties rather than the purchase price.
Buying advantage
Given the buying advantage that individuals can obtain from bridging, it is surprising that it is not used more extensively.
Our own research indicates that there is patchy take up of this form of finance among property investors. This could be down to the fact that advisers are not aware of it. A survey we conducted revealed that 28 per cent of brokers regarded themselves as being ‘unfamiliar’ with bridging. 14 per cent said they were ‘not very familiar’ and 14 per cent were ‘not at all familiar’ with bridging. A further 25 per cent of brokers consider themselves only ‘quite familiar’ with it.
Hopefully, what I have set out above may have interested readers who are unaware of bridging. However, a word of advice is in order.
The cost of the bridging and the level of service vary considerably from lender to lender – much more so than in the mortgage sector. Before you opt for a particular lender, ensure that they at least meet minimum standards. They should be charging interest on a daily basis in the month of redemption; have minimum terms of no longer than one month; and no early redemption penalties other than the minimum term.
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You should also look to those who have invested in their web presence and have sophisticated processing capacity in place to ensure deals complete to plan.
If you do your homework and develop a relationship with the right firm, you – and your clients – stand to benefit handsomely.
