The pace of life seems to be accelerating exponentially and the expectation of all of us as consumers is founded on the understanding that good service is a right. Whatever it is we want, we tend to want it now and not have to wait. As a result, speed is a key component of any service proposition, and in the bridging finance market, is probably its main USP. Without the ability of specialist lenders to provide temporary funding in a timely manner, there would be no bridging industry.
In its simplest form, bridging is short-term finance taken out to facilitate property transactions. It can be a first or second charge, or a combination of both, secured against either residential or commercial property. As we have already said, one of the main benefits of bridging finance is the time taken to arrange. Normally, completion can take place within seven working days but in cases where there is an even greater need, that time can be cut even further. Before Christmas 2005, we received a request from a broker whose client wished to make a property purchase before Christmas, and needed to borrow £3.5 million. Working closely with his adviser the loan was completed within two days from the date of enquiry, and the transaction completed on 23 December.
Short time frame
The scenario above demonstrates just how fast bridging finance can be. In this case the only way the client could find the finance in the short time frame was through bridging. Once the loan was in place, he had the breathing space to arrange longer-term funding.
A key aspect of bridging is that it facilitates property transactions, but it is never meant to be a permanent funding source. The client must put in place more permanent finance in the shape of a long-term mortgage or, in the case of a more speculative transaction, the client should sell the property. As part of an intermediary’s armoury, bridging finance is an important ‘can do’ weapon, and as long as all of the client’s needs have been considered, and the costs explained then bridging remains the most appropriate method of making many property transactions happen.
Open or closed
Bridging finance can be taken either ‘open’ – with no definite date for the end of the loan, or ‘closed’ – where a redemption date is known at outset. The open variety would only be used where the client and their adviser were very confident of their strategy concerning either the final sale of the property, or the putting in place of longer-term finance. In the case of a developer looking to renovate property to sell on, open bridging finance, while expensive, can prove to be the most practical method of funding.
Another reason why bridging meets the needs for ‘fast finance’ is because it tends to be ‘non-status’. The lenders in this market are looking primarily at the type and quality of the security as the measure of lending suitability rather than a traditional assessment of affordability. Lending can be made against up to 75 per cent of property value and therefore, apart from credit checks, the non-status element is no different from similar mainstream non-status lending. The effect is that the decision to lend is fast. Obviously, any responsible lender will want to be sure that loan repayments can be met, and when bridging is arranged, up to six monthly repayments are often advanced as part of the loan.
Other uses
Traditionally, bridging finance has been used to complete the purchase of another property, usually a principal residence, before borrowers have sold their existing home. Other uses include purchasing property at auction, where funds are required quickly to complete the purchase; buy-to-let investors negotiating discounts for quick completion; and entrepreneurs who need money urgently to fund a new business or acquisition. Property developers can make use of bridging finance to fund the purchase of property that will be refurbished and sold on in a short space of time.
One under-utilised area where bridging finance can be used is as part of a financial rehabilitation package for clients in financial difficulties. Its non-status facility makes bridging finance a particularly effective tool in raising capital to deal with immediate repayment of pressing debt. This in turn allows an adviser to arrange longer-term refinancing which will help the client to re-establish himself. Bridging finance in this case could mean the difference between a client having the time to put a proper refinance package in place and financial oblivion.
Bridging finance is not a substitute for longer-term finance. It is a tool to enable property transactions to go ahead, where traditional funding methods will take too long. It is important for all brokers to be aware of how and when bridging can be used. At Cheval we spend a great deal of our time training brokers in these skills, but this is an investment we are very happy to make.
