Have you met the modern bridging loan...?

Traditionally bridging finance was used when a residential property purchase chain had broken down but now the use of this type of finance has expanded. Peter Barnes, Commercial Consultant, looks at how short-term finance has evolved to meet today's market.

Traditionally bridging finance was used when a residential property purchase chain had broken down but now the use of this type of finance has expanded, primarily due to the increasing numbers of specialist lenders in the market place and with the facilities being used for more than just the time-honoured purpose.

The existing perception of banks taking longer to process applications for secured lending has led to the growth in the number of bespoke bridging finance companies entering the market. All of which offer different terms and conditions on an expanded product range to meet a number of gaps in the market, where holdups in processing funding applications have seen clients lose properties and the structure to move and complete quickly is of the essence.

Bridging loans can be used for a variety of reasons (both traditional and some unfrequented purposes) in commercial areas where a short-term temporary facility allows a purchaser to take advantage of a bridging product to secure their prescribed outcome. These include circumstances such as:

A quick turnaround in the sale process – the ability to complete as an effective first link in a chain can provide the ability to negotiate a better purchase price.
Keeping your place in a purchase chain – if a chain breaks down due to the inability to sell your property in time or a buyer pulls out, a bridging loan can be used to ‘bridge’ the gap so keeping your place in the chain.
Auction purchases – with the need to complete usually within 30 days of the auction, bridging finance provides the ideal vehicle for funding auction acquisitions. In these scenarios, the bridging finance can:

Simply provide a swift conclusion to the purchase when no works are required to enable yourself or tenants to move in.
Allow a purchaser to take ownership of a property in need of refurbishment and provide an adequate period of time to undertake the modernisation, pending a refinance onto a traditional residential / buy to let mortgage or a period for the property to be marketed and sold.

To acquire an underperforming business (when freehold and goodwill are being purchased) which does not evidence the profitability to service a conventional long-term loan. The bridging term can be used to allow the new operator to run the business for 12-24 months to its full potential and produce a profit and loss account at the end of that period which can promote the bridge to be refinanced on to a standard business mortgage facility.
To buy a property pending funds due to repay – In circumstances where funds from another business venture or demonstratable source are due or delayed, bridging finance can be utilised to fund the short-term cash flow requirement.
Development Finance – Bridging facilities can be used to fund small short-term development projects, with funds repaid once the property is remortgaged or sold. Longer-term development finance is available and may be more appropriate depending on circumstances.
Developer Exit - Developers look to using short term loans to repay their development loan from the bank, which they used to fund their development. This occurs when the builds have been completed but the developer still has units to sell. Developers need to repay their loan as soon as possible and often also free up equity to move onto their next development. Short term finance allows them to do this before all the units are sold.

Less ‘traditional’ uses of bridging finance which are now becoming more popular include:

Use to fund a short-term cash flow requirement - A short-term loan secured against property pending trade receipts/monies owed/sales made where a period of credit has been agreed.
Probate and Inheritance Tax Issues – In some circumstances it may be necessary to release charges and borrowing on a property to pay Inheritance Tax after a bereavement. Bridging finance can be used to fund these situations with repayment from the equity of the estate once the property has been sold/remortgaged by the beneficiary.
Property purchases below market value – In situations where an opportunity to purchase a property at below the market value, traditional lenders may not wish to enter into such a transaction even if there are genuine reasons for the circumstances arising. On the presumption that a solicitor can provide an undertaking outlining the reasons behind the under-value sale, a bridging loan could be used to make the purchase and funded until an appropriate period of time (usually 6-12 months) has passed and mortgage lenders are more comfortable in extending a normal mortgage.
Pay Tax Liabilities – An unexpected tax bill may create issues with HMRC. On the understanding you have monies due to meet the liability after the date the tax is due, a bridging loan may be the answer.
Lease extensions – If a leasehold is coming to the end of its term, a short-term bridging facility will allow the time necessary for the legal work for the lease extension to be granted. Again, this would then be refinanced through a traditional mortgage.
Avoiding a property being repossessed – In the unfortunate situation of repossession, a mortgage lender will often sell a property with a view to simply repaying their debt with any equity in the property potentially lost. In this scenario, if there is sufficient equity in the property the owner could refinance the mortgage onto a bridging facility repaying the mortgage. The interest charged while the bridging loan is outstanding could be added onto the loan, so the owner has no repayments during the term of the bridge with the loan. The owner then retains full control over the sale and will also retain any equity when the property is sold.

Bridging provides you with various options in regards to repayment and fees during the term of the loan:

Fees and/or interest can be covered by the borrower during the term of the loan allowing the full, normally between 70%-75%, loan to value criteria (although we do have access to providers who will on exception lend up to 80%) to be borrowed to release maximum funding/cash at the outset.
Fees and/or interest can be added to the loan resulting in no serviceability/repayment during the term of the loan or up-front fees to be met. In these cases, the interest and fees would be calculated at the outset and deducted from the loan amount (again usually 70%-75% LTV 80% in exceptional cases) resulting in less ‘cash in your hand’ at the outset. With fees and interest added an amount of c.60%-65% (70%-75% if lending up to 80% gross) LTV is usually achieved.

Other Features To Be Aware Of

Exit fees – Loans are usually agreed for between 1 – 24 months. If the loan is repaid earlier than the term agreed, there may be early repayment charges. This will be discussed with you, as we will find a lender that will be suitable for your circumstances and managed accordingly.
Interest, if ‘front-loaded’ (see fees and interest added to loan above), will be refunded pro-rata if the loan is repaid prior to the originally agreed term.
Terms are generally flexible – each case is assessed and placed before an appropriate lender on its own merits.
If interest is being serviced monthly, then an assessment to ascertain a ‘reasonable outside income’ will be made.
Our residential bridging providers are often able to provide an offer letter alongside the bridging offer letter, to give reassurance to the purchaser that a term mortgage will be available upon repayment of the bridging loan.

Costs

For indicative purposes only, residential bridging rates range from c.0.43% to c.0.89% per month depending on loan to value (£430 - £890 per month per £100,000 borrowed) with commercial rates ranging from c.0.85% to 1.1% per month again depending on loan to value (£850 to £1100 per month per £100,000 borrowed).

Rates for the lending at 80% LTV are higher varying between c.1.1% to c.1.45 per month depending on exact loan to value (£1100 - £1400 per month per £100,000 borrowed).

In Summary

The essential component of assessing the viability of any bridging request is the practicality of the repayment source i.e. remortgage on to a longer-term product, sale/liquidity of the asset, cash from other activities. Bridging finance of between 70%-75% loan to value is always secured against property be it a first or second charge and is a slightly more expensive source of finance compared to a traditional mortgage. However, when used in the appropriate transactions these costs can be offset against the profitability and long-term end value of the project, and the immediate peace of mind of securing that dream property (residential/commercial) or business.

How To Apply!

Mortgages for Business has extensive experience and relationships with numerous bridging lenders that will give you the flexibility to assess your options (and maybe those you had not considered).

If you would like to discuss a bridging loan or any type of commercial mortgage, please give me a call on 01732 471641 or email me directly on peterb@mortgagesforbusiness.co.uk

18th July 2019