The continuing property investment boom has resulted in record bridging activity across the UK financial services industry, however being a growing part of the mortgage market, bridging finance is the unknown and often misunderstood relative of the sector.
Many see bridging finance as a ‘distress product’ used as a last resort when all other financial avenues have turned into cul-de-sacs. The reality is quite different; bridging is ideal for individuals with wealth in the form of property assets who want to easily and quickly extract liquidity from those assets.
The sector is becoming more sophisticated and offering professional intermediaries who grasp the opportunities big advantages. It is suited to anyone who needs finance at short notice and is able to use property as security.
Bridging finance offers the advantage of being able to borrow against the value of a property rather than income multiples. This is a huge benefit to self employed borrowers, or companies with less than two years trading history, who do not fit within the criteria of the high street banks and building societies.
In most cases borrowing is against open market value (OMV). High street banks will generally only lend against the lower of the purchase price or valuation. Bridging therefore offers significant benefits for property developers who are often able to identify a bargain or perhaps negotiate an option to purchase at a lower price and then secure planning consent.
With a specialist bridging lender borrowers often find they are able to borrow the full agreed purchase price. This can be attractive as they only have to pay the interest accrued during the bridge rather than investing a large lump sum up-front.
A lucrative sector
Bridging can be a very lucrative sector for the switched-on professional intermediary because it is usually a two stage process. Income generated on the bridge is generally 1 per cent of the loan amount and in most cases is paid on drawdown. The second phase is usually a re-mortgage which offers a further opportunity to earn commission.
Because of the increasing sophistication of the sector most lenders prefer to engage through a professional intermediary. Banks and building societies tend not to be flexible when it comes to bridging, so it makes sense to speak to a lender who specialises in bridging finance. If brokers feel that bridging is unfamiliar it is good idea to establish a relationship with a lender before the actual need arises.
The typical terms of a bridging loan can be from a few weeks to, in some case, two years. Just like a standard commercial mortgage, lenders need to be assured that they will be paid back as they do not want to be in the property owning business.
A professionally prepared val-uation from a recognised UK valuer is the cornerstone of a bridging loan. Although applications will undergo checks on the client’s ability to repay the loan the lender relies primarily on the valuation for the security.
Looking at the bigger picture
Bridging loans due to their very nature and higher risk come at a higher cost than standard loans, but without them many property transactions would fall by the wayside. In this way, brokers need to encourage their clients to look at the bigger picture and view the bridge as a deal cost.
In general, the length of the loan, the amount of risk that is present for the lender, the quality of the applicants credit history and the liquidity and value of the collateral all are used to determine the interest rate and the repayment terms. Of course, rates and terms are always negotiable and a motivated lender should work hard to match their client’s needs.
Professional intermediaries need to put aside their misconceptions about commercial bridging and get ‘switched-on’ to the opportunities this type of finance can offer both themselves and their clients.
David Riddick is chief surveyor at Mathon Finance
