Bridging – Who, what, where, why, when….
When it comes to short term finance for the purchase of property, the most common structure used is what we call in the industry a ‘bridging loan.’
Over the past few years, I have found myself dealing with more and more clients using this type of facility. Now, nobody ever really wants a bridging loan so WHY are they in existence and WHO might need one?
Specialist lending such as bridging is often far more expensive than the more conventional long term lending option, so it is vital that you use a professional to explore your options and discuss the pros and cons. Bridging used to be a bit of a dirty word in the world of finance, however, lenders have drastically reduced the costs to clients over the past few years, it has become far more commonplace.
So WHY are they so popular in today’s market and WHO needs them? Simply put, sometimes there is no other option.
Has your buyer pulled out at the last minute and put your dream move into jeopardy? perhaps you can ‘bridge’ the gap whilst you find another buyer. Have you found a property that is a ‘doer-upper’? It is simply unmortgageable in its present state because it has no bathroom and/or no kitchen for example. Perhaps you are going to auction to buy your first investment property. If you do not have the full balance to hand you will need quick funding to complete within the usual 28-day timeframe.
These scenarios and many more would likely require a bridging loan, with the intention always being to either sell or refinance the property onto longer term cheaper finance as soon as physically possible.
So, WHAT are the pros of taking bridging finance?
Speed – this type of finance can often complete within a few days and usually no longer than 1 month.
No exit penalties – you only pay for the loan whilst it is outstanding, there are usually no exit penalties like most conventional longer-term lending. The goal for any bridging finance is to repay it as soon as possible. I’ll explain more when we talk about the exit!
Light touch underwriting – unlike regular mortgages the lender is ready and waiting for a ‘wrinkle’, they price according to the heightened risk of this type of transaction. I like to use PLEBS when explaining to a client WHAT I require in order to successfully undertake a bridging loan application for them:
Purpose: What is the purpose of the loan i.e., purchase/refinance/capital raise?
Lending: What is the required loan amount/what are the funds going towards?
Exit: How is the applicant looking to repay the loan?
Borrower: What/who is the owner? What is their experience?
Security: What is the address? Type and condition of the property?
These are the building blocks of any bridging application, if each of these make sense then you are good to go.
When advising a client who is considering short-term bridging my main priority is always how they will repay the loan and what is the exit? It is relatively easy to get a bridging loan but far more complicated to repay sometimes! Having more than one option as a repayment source is a must. Things change, for example some properties do not sell as quickly as hoped, the world encounters a pandemic that threatens the very way we live, etc…all these things can and have happened before. At Affinity we really scrutinise the exit plan based on as many exit routes as possible. Previously I have declined to work with clients because I fear that their exit plan is not strong enough. I care about my clients; I genuinely want what is best for them and their families.
So WHEN should you contact me if you are considering bridging as an option?
Do not delay… we can talk through your plans and if needs be I can have some indicative terms for you the same day. It’s far better to be negotiating from a position of knowledge with vendors and estate agents knowing you have a solid offer of finance available. Do not worry, it will not cost you anything for a chat so you have nothing to lose. I would love to hear from you.
As with all borrowing, every person, business and case is different so please contact me or one of the team to talk about your plan’s, I’ll be delighted to help where I can. My promise to you is that I’ll always do what is right for you, your families and your business.
Director, Specialist Finance