Bridging Loans – FAQ’s
Below we have provided information on the Bridging Loan market in Q&A format, which we trust will be of use to both the experienced property investor/developer and to those starting on the ladder.
How would you describe the demand for Bridging Loans at the moment?
The demand for quality housing, both to purchase and to rent is strong in many parts of the UK and it is not surprising therefore that there is also strong demand for bridging loans, also known as short term finance, from property developers, traders and investors. The supply of BTL and residential investment mortgage lenders (offering portfolio mortgages) and products has improved significantly in the last year or so and take up is strong. As expected there has been a similar increase in demand for bridging loans as it is often not possible for an investor to secure a BTL or residential investment mortgage on acquisition of a property (the property may be acquired at auction, or undervalue, or in need of refurbishment etc.) and there is a need to put short finance in place, pending remortgage later. It remains to be seen what effect, if any, the proposed SDLT and taxation (removal of higher rate tax relief on mortgage interest) changes have on demand for residential investment properties and funding.
Note: there are innovative Bridge to Let products on the market from single source lenders; which consist of a bridging loan that converts to a BTL – Commercial Mortgage.
Turning to the commercial investment property market; we are seeing demand for short term finance as the traditional source of finance for this asset class, the high street banks, are not interested unless the tenant has a prime covenant. The supply of term mortgages for commercial investment property has improved, mainly from the challenger banks who are lending on secondary covenants and short leases (subject to proven local demand for the asset type), and this in turn is resulting in an in improvement in demand and liquidity.
But it is not just property investors and traders that seek bridging finance is it?
Absolutely not! Bridging loans can be used to secure finance for almost any legal purpose. The lender will wish to know what the money is being used for and how they will be repaid which will be either by sale or re finance. The loan can be for purchase or refinance. It can be on a 1st or 2nd charge basis (and even a 3rd charge). The loan may be secured on a residential or commercial property or portfolio of properties, or on land with a valid planning consent to construct either residential or commercial property.
And what about the supply of Bridging Loan finance?
The market is buoyant with literally dozens of lenders, many of whom have entered the market in the last 12 months or so. Frankly many are offering nothing new or innovative but amongst them there are lenders that genuinely have something to give. Be it high LTV’s, competitive pricing, excellent service or user friendly processes. Bridging lenders have moved into traditional high street banking space and are filling the gap left by their absence from the market.
The increase in supply is having a positive influence on the market. Pricing is reducing (although it is not and is unlikely to ever be at pre downturn high street bank levels), LTV’s are at or near pre downturn levels and geographical spread has reached parts of the UK other than London/SE (with limited availability in Northern Ireland).
So, the high street banks are not lending in the bridging market?
No, they are not; and are unlikely to at any time soon. The high street banks just don’t want short term property loans on
their books which carry expensive capital costs and are perceived as high risk.
And who are these lenders and where do they get their money from?
A mixed bunch! Many are backed by investment and hedge funds, some by private wealthy individuals and family offices. others have wholesale funding lines from banks and in the last 12 months or so a number of Peer to Peer platforms have entered the market. A few of the challenger banks have successfully launched into the short term loan market offering innovative products and competitive pricing and have the added benefit of being able to provide take out long term BTL Commercial Mortgage funding (Bridge to Let).
The challenger banks; who are they?
This is a collective name given to a few new to the market banks. They have depositors and a banking licence and are structured in a way that enables them to offer both short term funding and more crucially long term funding to property investors and trading businesses. Two of these banks will not accept business directly from the public but only via accredited brokers.
How much can be borrowed against a property asset?
It depends upon location, the nature of the asset, the class of security and the intended source of repayment. The maximum gross loan that can be sourced on residential property is 80% Loan to Value (LTV). The median is nearer 65% LTV. If a property is being purchased most lenders will require a minimum cash contribution of c.10% irrespective of the LTV; in other words if a borrower is acquiring a property at undervalue they won’t fund 100% of purchase price (unless additional security is provided), although at the time of writing (January 2016) it is mooted that a lender is about to launch a 100% LTC loan for below market purchases – watch this space. LTV’s for commercial property are more bespoke and will depend upon asset type, location and exit route. However on a speculative basis the maximum is c. 60% LTV and the median is c. 50% LTV; however if there is a defined take out in place such as an offer of refinance or a contracted sale up to 80% LTV may be possible. Funding for land with planning consent may be sourced up to 80% LTV (but with the same lender offering take out development finance); the norm is nearer 60- 65% LTV.
Some bridging lenders are moving into the heavy rerfub – development finance space with a number offering a two stage loan – one for the acquisition of the asset and one for the cost of the building works.
What do you mean by gross loan? And is there a net loan?
The gross loan is the maximum LTV offered by a lender. The net loan is the amount that the borrower receives. The difference between the two will be any deduction for interest, lending fees, and legal fees.
So how is interest charged?
Retained: Interest may be retained on day one from the gross loan. So if the loan is for £100k and the interest rate is 1% flat per month and the loan is for a 6 month term then £6k will be retained and a net loan of £94k made available.
Rolled up: Interest may be rolled up within the facility but within the maximum LTV.
Paid: Interest may be paid monthly by the borrower from their own resources.
Factors such as lender policy, LTV, exit route, and financial covenant of the borrower will determine how interest is charged.
How long is a typical Bridging Loan term?
24 months or less although longer terms may be negotiable if there is a genuine need for it. Note: residential investment properties that are let may be refinanced on Medium Term Loans of up to 5 years and whilst these are not bridging loans they may fill the gap between short term bridging and long term commercial investment mortgage or BTL funding.
How do lenders decide whether to lend on a project?
Some lenders will underwrite on a full status basis (like a bank, and requiring full disclosure of the applicant’s financial position), others on a semi-status basis (requiring some financial information about the client) and others on a non-status basis where they are purely interested in the asset rather than the borrower. Ultimately the lender must be comfortable with the proposed exit route (sale or refinance).
Will funders lend to applicants with adverse credit?
The term ‘adverse credit’ applies to minor breaches such as the odd late payment on a credit card through defaults and CCJ’s to bankruptcy. The extent of the adverse credit will determine whether a lender will proceed but there are some lenders that lend on a non-status basis and therefore will ignore this. Others will take a measured view and are more likely to lend if the exit route is sale rather than re finance. Undischarged bankrupts cannot borrow by law.
How much does it cost to borrow on a Bridging Loan?
The increased supply of bridging lenders has brought competition to the market and pricing is falling which is good news for the borrower. Lenders charge in a variety of ways including some or all of the following: monthly interest, completion fee, exit fee. As this is a short term product headline interest rates therefore carry a health warning and borrowers should calculate the total cost of the loan to include all financial charges, legal fees and valuation fees.
In theory status loans should be cheaper than semi or non-status, and there is some truth in this but it is not always the case. We try to avoid lenders who require full disclosure and underwriting but charge penal rates more appropriate to non- status loans. If applicants have a strong financial position, a clean credit file, are prepared to provide full disclosure and a realistic exit route then ‘reasonable’ pricing can be sourced.
It would be misleading to quote specific charging structures in this text but a comprehensive suite of products may be viewed on the web site under Bridging Loan Products. To enable you to compare products and pricing you can input the details into a Bridging Loan Calculator which can be found on the web site under Resources.
Is bridging finance available throughout the UK?
It is available in England, Wales and Scotland but there is little appetite for Northern Ireland, although one lender is very active in the province, albeit at sensible LTV’s. Many lenders are now less London/SE centric than a year or so ago but LTV and pricing are often determined by local liquidity.
What is the maximum loan available in the market?
At Optima we broker property bridging loans from £250k (smaller loans are available from £30k). At the top end there are lenders offering funding of £25M +
What legal entities will lenders fund?
Sole traders, partnerships, LLP’s, Ltd Co’s and offshore vehicles. When the vehicle is to be a Ltd Co, lenders will often prefer it to be a Special Purpose Vehicle, or SPV, set up for the specific project and owning only the project asset/liability. Where the borrower is to be an offshore vehicle full disclosure and audit of the directors and beneficial owners is required.
What security will the lender require?
All borrowers 1st charge – 1st charge on project asset
Ltd Co’s/LLP’s – 1st Debenture & Personal Guarantees (normally for full debt)
All borrowers 2nd charge – 2nd charge on project asset
Ltd Co’s/LLP’s – 2nd / Debenture & Personal Guarantees (normally for full debt)
How will the property be valued?
Lenders will appoint a valuer of their choice (sometimes they will work with an existing valuation) to value the property and
depending upon their underwriting criteria will request a figure for one or more of the following:
• MV or Market Value
• MV with a restriction which can be 90 or 180 day
There will normally be a reduction in valuation for the 90 day sale value (and sometimes the 180 day) and this will depend upon location, property type, demand etc. If the project includes improvements to the property which will increase the value the lender may ask for both the ‘as is’ value and ‘end’ value.
How quickly can Bridging Loan lenders operate?
Very quickly. Many lenders are geared up to provide indicative terms within hours, an offer (subject to valuation in 24 hours or so) and they can often complete the transaction in a matter of a week or so.
Can you provide examples of currently available Bridging Loan products?
For examples of currently available products visit Bridging Loan Products on the web site. As the number of lenders and products are numerous it would be cumbersome to provide details of all so we have included those that are market leading or have a USP. Please contact us to discuss your project and we will always aim to match a lender and product to your requirements.
What resources are available to property developers, traders and investors to assist them in raising finance?
We have provided a number of tools which you may find of us (aide memoirs/A&L templates/calculators etc.); to view and download please visit the Resources section of the web site. We have provided a list of industry links that you may find of use (RICS/RIBA/Law Society/Planning Portal/ Warranty Providers/Sales Data etc.); to view visit the Industry Links section of the web site.
How can Optima help property developers, traders and investors with their finance application?
There is such an array of bridging loan lenders and products it would be impossible for a property professional to keep tabs on them and even when a lender is chosen the applicant has no way of knowing if they will perform. Many don’t. At Optima we have the experience and the contacts to broker market leading bridging loan products (some of which are available from the challenger banks only through accredited brokers) and would be pleased to
discuss either a specific project or the market in general with you; and of course in confidence. To get an understanding of how we offer a professional and transparent brokerage service please visit the web site and view the About Us page and take a look at the Successes page where we have posted both testimonials from satisfied clients and examples of project case studies.
If you have a specific enquiry about Bridging Loans, or wish to discuss the market in general, or indeed require clarification on anything you have read in this article please do get in touch.