Bridging loans: A cheap rate or flexible terms?

Great for auction purchases and refurbishment projects, these days bridging loans are well priced, quick to secure and cheaper to exit than other types of interim funding but how do you find the best deal? Peter Barnes explains and provides a potted history of how the bridging market has developed since the 2008 Financial Crisis.

The challenger banks offer great rates and the smaller bridging lenders have more flexible borrowing criteria. But if you’re a portfolio landlord, how do you know which option works best for you? First, let me give you a quick bit of background to help you understand how the lenders evaluate these deals.

A brief history of bridging finance

A permanent addition to the portfolio landlord’s toolkit of property finance, bridging loans have come a long way since the Credit Crunch. Once the bad boys of the industry, they have shrugged off their back-street image and stepped squarely into the spotlight.

Less constricted by regulation than the high street providers, between 2010 and 2014 new bridging lenders were quick to exploit the growing demand for property finance at a time when house prices were subdued and the need for rental accommodation outstripped supply.

Compared to the mortgage market, the nature of bridging enabled funding to be quickly recycled without the need for large, long term loan books. In 2012 alone, it was estimated that total bridging lending totalled c.£1 billion. And with interest rates at a constant low, there was a ready-made customer base in the form of landlords and high net worth individuals looking for better returns on their savings. Thus sprang a thriving cottage industry of bridging providers doing lots of business lending in small volumes.

But like Darwin’s theory, the sector continued to evolve. As the capital markets opened up, the institutional investors moved in. The challenger banks, in particular, more agile than the high street, have been able to secure scalable funding lines which has lead to increased competition, compressed margins and sector growth supported by:

• Rising property prices in a liquid housing market
• Strong growth in buy to let lending – a great exit route for bridging borrowers
• Bridging lenders’ ability to offer bespoke solutions on complex borrowing requirements
• Canny investors recognising properties with the potential for serious uplift in value – think extensions, conversions and change of use under permitted development rights
• The demand for affordable accommodation and developers’ ability to produce a larger number of smaller units with a higher specification
• Attractive returns for lenders

All this has been very good news for borrowers.

Fast forward to today and bridging loans are the life-blood of portfolio landlords buying at auction and refurbishing tired properties. It is estimated that £4-5 billion was loaned in 2018.

Of course, for both lenders and borrowers alike, there are still risks, brought on by the uncertainty surrounding Brexit, in particular, a potential property price correction and reduced investor (institutional) confidence in the UK.

However, in my opinion, this is somewhat balanced by the huge demand/shortage of affordable housing in the UK which is why, generally speaking, house prices are holding up better than expected.

Now, we are seeing the smaller lenders still jostling with the institutions for business and it’s usually the broker who helps the customer decide which borrowing route best suits their needs.

Bridging rates and terms from the challenger banks

Broadly speaking, rates from the challenger banks are cheaper than those offered by the smaller bridging providers, but their lending criteria is stricter.

Interest rates:
From 0.43% - 0.64% pcm. The interest can be paid monthly or rolled up which means that it is deducted from the loan amount so that there are no monthly payments.

LTV:
Up to 75% gross. i.e. including the lender’s arrangement fee and rolled-up interest, if applicable.

For example, if the arrangement fee is 1% of the loan, the amount of money available to you will be 74% LTV. If the interest is rolled up into the loan, the LTV will reduce accordingly too.

Terms:
3-18 months

Arrangement fees:
1-2% of the loan amount. The fee can be paid upfront but is more commonly deducted from the loan amount.

Underwriting:
Experienced landlords and developers preferred with a good, clean credit profile.

Will lend on retail units (from single-unit shops to parades and malls), offices, B&Bs, mixed-units (i.e. shops or offices with flats above).

Will not lend on heavy industrial, petrol stations, religious property, hostels, bedsits, equestrian centres, public houses, agricultural properties, catteries, kennels, golf clubs, hospitals, mobile home parks and garden centres.

Processing:
If necessary, we discuss the case directly with the lender’s Business Development Manager to get a steer on whether it’s likely to be accepted. We can usually get a Decision in Principle from the lender within four hours. From application to completion expect 3-4 weeks.

For auction purchases, you’ll need to provide the seller’s pack. For refurbishment projects, you’ll need to show a schedule of works and costs including a contingency amount.

Rates and terms from the smaller bridging providers:

With the smaller bridging providers, you can expect much more criteria flexibility but you will pay more. Having said that, rates are still quite reasonable:

Rates:
From 0.75% - 1.25% pcm. Paid monthly or rolled up.

LTV:
Up to 75% gross (please see the challenger bank rates for an explanation)

Terms: 3-18 months
Arrangement fees 1-2% of the loan – paid upfront or added to the loan.

Underwriting:
Although experienced landlords and developers are preferred, they will accept borrowers with less experience and a less than perfect credit profile. This is where our knowledge and expertise comes in – we’re pretty good at matching your circumstances with the right lender.

Will lend on a much wider range of properties including retail units (from single-unit shops to parades and malls), offices, B&Bs, hotels, mixed-units (i.e. shops or offices with flats above), hostels, bedsits, equestrian centres, public houses, agricultural properties, catteries, kennels, golf clubs, hospitals, mobile home parks and garden centres.

Will not lend on heavy industrial, petrol stations or religious property.

Processing:
The actual process is similar to that of the challenger banks. We discuss the case directly with the lender’s BDM to get a steer on whether it’s likely to be accepted. We can usually get a Decision in Principle from the lender within four hours. From application to completion the turnaround time is usually a bit quicker, expect 2-3 weeks.

Again, for auction purchases, you’ll need to provide the seller’s pack. For refurbishment projects, you’ll need to show a schedule of works and costs including a contingency amount.

Example of bridging finance in action

So that you can see how it works, here are the details of a bridging deal I secured for a client recently with one of the challenger banks at a rate of 0.64% pcm which, if the refurb goes to plan, will net him a profit of c.£83,000.

Borrower:
Experienced portfolio landlord who is also a builder. He has a clean credit profile.

The property:
A Victorian townhouse in a popular commuter town close to London. Purchase price £600,000 available for sale via a commercial agent which had identified the property as a development opportunity.

The house was in need of a refresh before it could be let. The client intended to:

• Upgrade the kitchen and bathroom
• Replace the boiler, radiators and some of the fixtures and fittings
• Install better double-glazing to some of the windows
• Generally decorate throughout

The finance:
The client intended to fund the refurbishment works himself (£40,000) and had a deposit of £240,000 to put towards the purchase. This meant he needed a bridging loan of £360,000.

Once complete, he expects the house to have a gross development value of £775,000 and achieve a monthly rent of £3,000 on single AST agreement, which would provide a net yield of 4.6% pa.

From application to offer, the entire deal took just shy of four weeks. We’ll be keeping in touch with the client so that we can help him exit the loan when the works are complete. At the moment he intends to refinance onto a buy to let mortgage.

Here’s a summary of the figures: 

Property purchase price: £600,000

Client’s cash deposit: £240,000

Client’s cash for refurbishment work: £40,000

Loan amount: £360,000 (60% LTV)

Lender arrangement fee: 2% (£7,200) added to the loan amount

Interest rate: 0.64% pcm rolled up for 18 months

Here’s the maths:
£360,000 loan + £7,200 arrangement fee = £367,200

£367,200 x 0.64% compound interest over 18 months

£44,683

Total repayment amount: £411,883 (69% LTV)

(i.e. £372,000 loan & lender fee + £44,683 compound interest)

Gross development value: £775,000

Profit: £83,117

Here’s the maths:
GDV (£775,000) minus deposit (£240,000), refurb cash £40,000 and gross loan amount (£411,883).

It’s worth noting that I haven’t included legal or broker fees in the calculation – but still a very healthy profit if all goes to plan.

If you have a similar project or require bridging finance for any of the property types mentioned above, do get in touch to talk through rates and terms.

I can be contacted directly on:
Peter Barnes
Tel: 01732 471641
Email: peterb@mortgagesforbusiness.co.uk

Or you can request a call back at a time to suit you.

We are open Monday to Friday between 8 am and 6 pm – and outside of these hours by appointment. I look forward to helping you.

 

15th March 2019