Bridging loan finance continues to grow in an environment of low interest rates, Brexit uncertainty and mortgage lender caution.
Andrew Turner, chief executive at Commercial Trust Limited, looks at the rise of the bridging loan and its uses.
The Association of Short Term Lending (ASTL) reported that bridging lending totalled £3.98 billion in the 12 months to September 30th, 2018, representing a 21% increase over data for the 12 months to the end of September 2017.
So why choose a bridging loan?
Bridging loans are a short-term form of lending and are usually arranged much quicker than a buy to let mortgage, with turnaround times commonly around 28 days; although, one of the lenders we work with has the capability to pay out funds on the day of application (under the right circumstances).
Bridging loans can be used for a variety of reasons, including to:
- finance property purchase at auction;
- finance renovation work;
- purchase land for future development;
- purchase uninhabitable property;
- purchase stock;
- purchase machinery or IT equipment.
Clients can typically borrow up to 75% loan to value on a bridging loan and rates start from 0.49%.
Bridging loan rates vary, depending on factors such as the purpose of the loan and projected future rental income of the property (established by a valuer).
If the loan is to cover renovation work, then the lender might perceive heavier work (such as knocking down walls or building a conversion) to be a greater risk than a kitchen renovation. Therefore, the rate might be higher.
The two most common reasons we receive enquiries for bridging loan finance are property auctions and renovation work.
When purchasing property at auction, there is a 28-day timeframe in which to complete the sale. Arranging a mortgage in that space of time is generally completely unrealistic, whereas a bridging loan can give the client access to funds within this timeframe.
A recent case saw a client contact us ahead of a property auction.
Of course they did not know, at that stage, how much money they were going to need to borrow; but, we discussed their circumstances through a detailed fact find, to establish if they were likely to be approved for a bridging loan.
The financing will shortly be completed for this application.
Financing will often be based around the likely rental income that can be derived from the property being bought, so often the valuation will depend upon the condition of the property.
The nature of bridging offers opportunity for landlords to buy a property, renovate it and then “exit” the bridging loan (pay it off) with a buy to let mortgage.
Have an exit strategy
It is vital in all cases, that clients have an exit strategy for a bridging loan.
This could be through the sale of an existing, alternative, property, by buying, renovating and selling at a higher price than the debt, or as mentioned above transitioning to a buy to let or commercial mortgage (depending on the property type).
A third form of redemption, if the bridging loan is taken out by a business, is to pay it off at a later date through operating cash flows.
If a business has a short-term cash liquidity issue, due to an invoice that has not been paid on time, then a bridging loan could be used to pay bills or staff wages. Once the outstanding invoice has been settled, the company can pay off the bridging loan.
First and second charge bridging loans
When you are borrowing against the value of a property, it is possible to have more than one type of borrowing, as long as you are within loan to value limits and criteria fits your circumstances.
If you have a favourable existing buy to let mortgage rate on your property and want to raise funds, you may not want to remortgage, because other products are not as competitive and would put you at a disadvantage.
In this scenario, your mortgage lender holds the ‘first charge’ on your property (if you had to pay back the debt, they would be first in the queue to be paid). You could take out another line of borrowing, to raise the cash you need.
This would enable you to keep your existing mortgage.
If you were renovating your property or need access to funds quickly, a second charge bridging loan could be the right option for you.
The key to remember is, if the cost of the first charge is more expensive than the second charge you will take, it is unlikely that a second charge would be the most effective option; you would simply remortgage to raise the funds.
But, if the first charge is cheaper than the second charge you will take, you may benefit from a second charge solution.
Bridging loans are a short term product, it is possible to redeem within a matter of months, so if you are renovating to get your property up to a competitive remortgage valuation, you can pay it off as soon as the works are done (for example).
If as an investor you were previously unaware of this opportunity, if may be hugely beneficial to you, depending on what you are looking to do.