Bridging Finance in one form or another has been around for decades. However it has only bene the past four or five years that brokers and borrowers have started to realise the benefits of bridging finance loans.
The market has really started to boom over the last four or five years fuelled by various economic factors:
A strong economy with low interest rates helped create the most recent property price boom that started in 2002. It saw the demand for both self-ownership of property and investment in property growing rapidly.
For homeowners property prices were rising rapidly and properties were being sold quickly so the perceived extra cost of a bridging loan for a short period favored well against the probability of losing the property one was trying to purchase, given that it was likely to gain in value.
With the extra demand for housing, property development also increased and bridging finance was an ideal way to facilitate this.
Also the boom in equity created extra security for lenders in the existing property as well as in the new property. Charges could be cross referenced against both properties allowing an increased amount of funds to be lent.
The uses for bridging finance has also increased from the traditional bridge when buying one property before selling the existing property to providing a solution where short term funding is required for almost any purpose. This has meant that lenders have been more innovative on the products offered to match customers’ needs.
With the increase in this short term facility requirement, more lenders entered the market which has led inevitably to more competitive rates for customers.
How has the reputation of the industry changed over the years?
Bridging Finance used to be seen as an expensive option and one which customers would enter into as a last resort. Now it is seen as an integral and essential part of a brokers’ portfolio, enabling them to match all the needs of the client.
Who would typically opt for a bridging loan and in what circumstances?
Essentially customers who need finance for a short period with a known vehicle to pay off the loan in 12 months or less e.g. chain-breaking, buying from auction, capital raising, etc. Also for development purposes where funds can be drawn down at various stages as the project progresses.
What are the advantages of bridging finance over other forms of finance?
The lender can take a more open view because the loan is over a few months rather than a long term.
The loan is interest only with the facility to roll up or defer payments.
Stage payments can be arranged for development projects making it ideal for development finance.
Bridging loans can be partially redeemed, so lump sums can be paid off.
As it is a short term contract, there is no large early repayment overhangs involved, which would typically be applied to a medium/long term facility.
What sorts of rates do lenders/brokers charge?
Lenders rates often vary dependant on type of charge, property, status of client, length of loan and speed with which the loan needs to be taken out for and the risk involved.
Also many lenders only lend in one sector of the market, e.g. in the commercial & development market, the residential market, limited geographical location, more status clients, etc. Blemain group cover all market sectors.
Rates generally range from 1% per month.
Some commercial and development bridges are typically around 1.8% to 2% and residential bridging finance is available around the 1.25% per month to more status clients.
Some lenders charge around 1.5% for an initial period, typically the first 3 months and then increase the rate to encourage the client to redeem to loan within the pre agreed period.
Blemain Group doesn't differentiate on status and rates start from 1.00% and continue for the length of the loan written over a 12 month period, with no pre- determined increase in interest rates.
Rates can sometimes increase if the loan is required in a very short period, e.g. 24 hours
- Extra costs can be incurred with lenders' staff and solicitors, etc working overtime to get the deal funded in time.
- Or the lender perceives there is a higher risk than they would normally accept.
What should a client look for in a good bridging loan provider?
Ensure the lender has the facility to match the client's individual case at the most competitive rate.
The clarity and transparency of rate over the whole period is important as some lenders offer an initial competitive rate but then put pressure on the client to redeem early by increasing the rate after a period.
No consideration fee or application fee should be required.
Check the solicitor's costs aren't too onerous.
The exit vehicle should always be known at the start of the loan, but check if the lender has flexibility on this if it should overrun, either with an extension to the term or a different facility. Check the costs implications of this.
Check the lender can complete the case in time. Choose a lender with a proven track record of service and delivery.
What are your thoughts on the future of the bridging finance industry?
The use of bridging finance will continue to grow as the property market continues to evolve, resulting in new products and opportunities for brokers and clients alike.
Any thoughts on regulation/self-regulation? Are there any specialist brokers specialising in short-term finance?
There are some brokers who specialise in bridging finance.
The bridging finance market is already regulated in many areas under the FSA, CCA and OFT regulations. In the future more regulation will come in and cover an increasing number of facilities. With increased regulation will come increased transparency and clarity which in turn will increase the popularity of bridging finance as a vehicle to use as the short term funding option.
How competitive is the bridging finance market?
The market is very competitive, with a choice in most instances of lender's products. As competition increases there are more and more benefits to brokers and customers alike with competitive rates and innovative products. In the longer term the winners will be the lenders with excellent service and competitive products.
How important is it to go via a broker when looking for a bridging loan?
The position of the broker is just the same for bridging finance as it is for any other product, e.g. mortgages, second charges, etc. They will have a panel of products and lenders and will choose the right one for their client in the same way for any other business. Often a bridging loan is a short term fix for a longer term plan and the broker needs to be part of that overall picture to provide the client with the facility to ensure their expectations are achieved.
