While nearly everyone agrees that the property market is unlikely to crash, I do expect there to be more volatility, and this will present brokers with both opportunities and challenges.
Bridging finance is traditionally more popular in a volatile market for a number of reasons including; more housing chains collapsing; an increase in opportunistic purchases at a discount to market valuations; immediate resale of off plan new builds becoming harder; and an increase in repossessions.
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Added to this there are a number of general market trends that are making bridging finance increasingly necessary including; growth in self-build housing; significant increase in overseas property ownership; and a continued desire to convert and refurbish properties for residential use.
Estimates vary as to the size of the bridging loan market, with Datamonitor putting it at around £1.2 billion. If you then include commercial bridging it could be double this, but irrespectively it is, and always will be, a niche requirement.
Speed and service
However, bridging finance is far from the homogenous product that many people believe. Of foremost importance is normally speed and service, which is why smaller providers tend to dominate, rather than the high street banks. A same-day turnaround and next day drawdown are normally considered a prerequisite but, in reality, it is rare. The vast majority of lenders still work to up to 10 days from application to completion. Often borrowers will prefer to pay a higher rate for guaranteed service and speed.
Of second greatest importance is rate, and this is where mistakes can be made as bridging is, by and large, a distress purchase before longer term finance can be put in place.
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A cursory glance at bridging finance rates shows fairly dramatic differences in rates offered. At the most competitive end you may see rates advertised at as low as 0.79 per cent per month, but typically these are not at all representative as they only apply to low loan-to-values and perfect credit. At the other end of the spectrum are rates at 3 per cent and beyond, and with non-conforming, the interest rates can be even higher reflecting the individual cases.
Payment schedules
Another consideration is whether companies charge daily or monthly interest. The vast majority of lenders charge on a monthly basis and often a minimum of say three months. The impact arises if you are, say, one day late repaying the loan; a whole month’s payment would be due on a monthly rate; however, with a daily rate the impact wouldn’t be as significant.
Based on a 35 day duration loan and interest rate of 1.35% PCM, assuming 30 days per calendar month
Loan size Daily interest after month 1 Interest charged monthly in advance Loan with minimum 3 month interest charge in advance
200,000 £ 3,150 £ 5,400 £ 8,100
500,000 £ 7,875 £ 13,500 £ 20,250
750,000 £ 11,813 £ 20,250 £ 30,375
The majority of business is calculated on an interest only basis, with fees charged on top for valuations and legals, and proc fees are typically up to 1.50 per cent. It is also important to check if there are redemption fees.
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Another important consideration is whether to go for an open or closed loan. As we all know, events do not always go to plan, for example, a property bought at auction for a low price, may suddenly have defects that slows the mortgage process from days to weeks, and while it may be a commercial transaction, so any interest rate differential is tax deductible, it is often cash flow that is more important.
It is because of this unpredictability that you should always consider both open and closed bridges and at what cost. Few companies offer open bridges for less than 2 per cent, however, it can be sourced for as low as 1.35 per cent per calendar month.
One of the biggest issues for mortgage intermediaries is the ease of accessing product and rate details as there is currently no comprehensive database and the industry is quite fragmented with up to 60 providers. This could cause issues with the Financial Services Authority (FSA) and ‘Treating Customers Fairly’ (TCF) as the regulator covers bridging finance under the same rules as mortgages.
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The rules for regulated mortgage contracts state that you must either offer the ‘whole [bridging] market’, a ‘limited number of [bridging] mortgages’ or a ‘single [bridging] lender’. A whole of market search will certainly be difficult, but I would argue that calling a handful of providers under a whole of market proposition would definitely fall foul of TCF.
In conclusion, it should be remembered that bridging loans are far from homogenous products and much care and attention must be given to the nature of the loan required and the possibility of this changing unexpectedly.
