Bridging finance is still somewhat of an enigma to many intermediaries. While I think that the message of how bridging can be helpful is understood in a theoretical sense, the reality is that in most cases brokers let slip opportunities to help clients because they do not feel comfortable with a niche area which is not part of their core every day existence.
The market for bridging
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 also make use of bridging to fund the purchase of property that will be refurbished and sold on in a short space of time. For property investors, bridging finance is also a perfect funding tool to purchase a number of properties on a development, where the developer wants to make a quick sale at a discount to finish a building project.
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.
Fast funding
The world we live in is not just getting faster but is one where the requirement for quicker service and the speedy delivery of products is taken as a norm. While it might be argued that there is little correlation between consumer habits in the purchase of goods and domestic services and those involving property transactions, the evidence suggests that today’s consumer, whether involved in residential property or financing a business or business premises, is not going to be satisfied with the sometimes snail-like time frames in which standard lending sometimes takes place.
The market is full of opportunities but many are left begging. How many times, have brokers seen the deal they have worked so hard to conclude, fail because the chain collapses or the lender is unable to release funds in time? How many times are brokers asked for help from prospective or existing customers looking for funds to buy a property at auction or properties from a developer, where the price being offered is dependent on fast completion? Bridging can provide a robust answer.
So why is bridging finance regarded as being the fastest means to funding? The simple answer is that it tends to be ‘non-status’. Lenders are looking primarily at the type and quality of the security as the measure of lending suitability, rather than a traditional assessment of affordability. Unlike traditional lending, bridging underwriters are usually looking at a maximum term of six months rather than 300 months, so the parameters are very different. Lending can be made up to 75 per cent loan-to-value (LTV) and therefore, apart from credit checks, the non-status element is no different from mainstream non-status lending. The effect is that the decision to lend is fast.
Short-term funds
It does what is says on the tin. Bridging makes property transactions happen, but is never meant to be a permanent funding source. The savvy broker will ensure that more permanent finance in the shape of a long-term mortgage is in place for the longer haul, or in the case of a more speculative transaction, the client will sell the property to realise short-term profit. As part of an intermediary’s armoury, bridging finance is an important 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 property transactions happen quickly.
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 his adviser are very confident of their strategy concerning either the final sale of the property, or the putting in place of longer term finance.
Regulatory issues
Much has been made of the need for regulation of niche lending areas such as bridging. In the wake of compulsory regulation in the main mortgage market, intermediaries are more discerning in their research and there is no doubt that the ‘Treating Customers Fairly’ (TCF) regime has become an important part of every intermediary’s life. Efforts have also been made by a few lenders to form a trade association which would play a role in determining common standards across the industry. But there is still reluctance for some players to put their processes to the test of a transparent working model, where intermediaries and customers have the chance to see all the costs and charges before going ahead.
Bridging covers both residential and commercial property transactions, so lenders who deal in lending on residential property have to be authorised and regulated by the Financial Services Authority (FSA). However, brokers can find that in contrast to their experience with regulated first charge lending, quick and easy access to Key Facts Illustrations (KFIs) and the kind of information which ensures that the customer has all the information needed to make decisions, can be more difficult to obtain.
Getting involved
Bridging is a specialist niche market and it is important that brokers take the time to be fully conversant with how the process works and the principal players involved. I am constantly reminded that the onus on brokers to be compliant has raised the bar in so many ways, but particularly in terms of the time taken for research and understanding of the issues facing the client to ensure that the recommended solution meets the client’s needs and future aspirations.
Bridging, like other specialist areas, is an area of expertise which intermediaries need to have as part of their armoury. The thriving intermediary in a post-regulation market, will be the one offering customers a full inventory of products and services. But it is difficult to find yet more time in a busy schedule to study each new market.
For brokers to bridge the gap, the best strategy is to team up with suitable partners, prepared to work with them to fill in the knowledge gaps and provide the know-how and therefore the confidence to deal professionally with their customers. As in other mortgage disciplines, getting information and support to help develop business is not easy and bridging is no different. The simpler alternative to wading through countless lender websites and still being uncertain, is to outsource enquiries for this type of business. In the same way that brokers are finding it easier to introduce clients to specialists for secured loans and commercial mortgages, bridging finance enquiries can be handled by companies like ours, leaving the broker free to concentrate on core business needs. The transaction can be conducted with the customer from enquiry to completion, once the adviser has established that bridging is the appropriate funding method for his client. Introducing the client to specialists means brokers need never be short of expertise.
Bridging acts as the industry‘s elastoplast for deals where conventional lending is unable to meet time requirements or where the need is for genuinely ‘short-term’ finance. Brokers no longer need miss an opportunity to consider bridging because they do not feel equal to providing the right advice. By picking the right business partner, intermediaries can provide their customers with bridging finance expertise. The opportunity to assist more customers, open a new income stream and pick up referral business as a consequence is an unbeatable mix.
Ends
14.09.2006
Andy Moody, Loanoptions.co.uk
