By Alan Margolis, Head of Bridging, United Trust Bank
2014 was a very good year for the short term sector, and expectations are also high for this year. But rather than bask in historic success or consider the challenges ahead for the market as a whole, this article concentrates on how these loans differ from mainstream mortgages, and provides some pointers on how to get a short term bridging loan completed.
Lose your preconceptions
The days of bridging loans being used just to bridge the gap between a purchase and sale of a residential property are long gone. The sheer number and diversity of lenders and the volume and value of the sector – now estimated to be in excess of £2bn – is not founded on one particular use alone.
Whilst the underlying purchase and sale of property does underpin many a bridging loan, the fact is that there are a vast number of reasons as to why short term liquidity may be required.
Bridging loans can be used for commercial/business capital raising, temporary refinancing of an existing facility and temporarily refinancing existing portfolios. For instance, one residential portfolio United Trust Bank refinanced in 2014 was designed to enable the borrower to bring his ownership structure onshore to provide him with more long term finance options.
A common theme we see is mature borrowers who do not need or probably qualify for a regular mortgage who wish to downsize and or relocate. Age in itself is not a barrier. The reason for the loan must make sense and of course the exit must be viable and realistic.
Other uses include where the ownership of an inherited property needs to be reorganised or where a recently acquired property requires refurbishment before a long term loan can be put in place. Developers can utilise bridging loans to extract equity out of completed but as yet unsold units in order to acquire their next project site or commence work on their next project.
One point often overlooked is that the property which is the purpose of the bridging loan, does not have be the only security offered, or even be a security property at all.
Security property can be, or include, the borrower’s family home (in which case it is a Regulated Mortgage Contract and only a regulated bridging lender, such as UTB, will be able to assist), but it can also be or include semi – commercial or commercial property. As the above mention of portfolio refinance implies, security can be taken over multiple properties including a combination of types of property. Ownership of the security property or properties can vary too and many also need to be structured. However, before we look at that and the uniqueness of each and every enquiry, here’s an example of a more unusual use of a bridging loan.
Bridging solves a Sitting Tenancy puzzle
Our security property was a house divided into two flats. One of the flats was vacant and one occupied by a Sitting Tenant.
The owner was willing to sell the house to the Sitting Tenant at a price which took his legal rights into consideration and was advantageous to him. The Sitting Tenant wished to purchase, but even at the price offered he could not afford to proceed.
Our borrowers were introduced to the Sitting Tenant through a family connection and they effectively agreed to finance his purchase, by agreeing to contemporaneously buy the property from him at a premium which made it worth his while to relocate.
After the purchase and determination of the Sitting Tenancy, the whole property would be unoccupied and our borrowers planned to convert the property back into a single residence, improve it and sell it at an enhanced value.
Given the rationale behind the discounted purchase price, United Trust Bank agreed to fund over 70% of the purchase price.
This was very nice proposition where we were able to help the property’s vendor, the Sitting Tenant and our borrowers to achieve their goals. The main issue was to ensure that the Sitting Tenancy was determined and this was readily achieved with the help of our solicitors.
Each case is unique, so get personal with the lender
One of the joys of working in bridging loans is that each case is its own story with individual quirks. It cannot be stressed enough how these loans do not lend themselves to an automated or tick box approach.
If you’re confident that a case will fit a lender’s criteria, then by all means email through an enquiry, or even better a completed Decision in Principle Enquiry form. This should enable the lender to provide indicative terms or a DIP – the terminology varies slightly from lender to lender – that same day, but almost certainly, by the next working day.
But the real point here is that some lenders, UTB included, welcome the broker calling to discuss a case or scenario. This provides an opportunity to consider alternative structuring such as taking additional or even different security, considering whether the term sought is appropriate and even who should be the borrower.
Good lenders know how to structure individual loans, and experience has taught us that the best way to do this is either over the phone or at a face to face meeting with the borrower, the introducer and sometimes their professional representatives as well.
Here’s a particular case in point:
£1.5m London loan completes in less than three days
Having sold their property and moved into rented accommodation, our customers had contracted to buy a family home in London for £4m with a long stop completion date.
However, after a few months, our customers decided that they liked living in the area of their rented property and chose to remain there rather than move to London as originally planned.
However, having committed to buy the property in London they still had to complete the purchase.
A few days before they were due to complete on the London purchase they were let down by a private lender. UTB’s bridging team were contacted on a Friday afternoon and within minutes we had spoken to the solicitors acting for both the borrowers and the lender which had dropped out. A Decision in Principle was issued that afternoon.
The borrowers were invited to meet at our offices the following Monday and a Bank representative visited the property in London on Tuesday. The loan drew down on Wednesday, less than 3 working days since receiving the initial enquiry. Our customers were naturally, delighted.
The case above points to another key differentiator to mainstream mortgages: speed. Whilst it is possible, and sometimes necessary, to complete bridging loans in extraordinarily short time frames, the reality is that most loans draw down within a few weeks. This is largely due to the fact that loans complete at the dictation of the borrower’s requirements and, in our experience, most borrowers do not need the money in a few days. What’s important to most borrowers is knowing that their loan CAN complete within their required time frame.
Valuers and solicitors
With bridging loans, the valuations can be arranged more or less immediately so that they take place very quickly. This is another example of the loan process marching to the borrower’s requirements and not the lender’s!
And whilst most lenders will have a panel of valuers, where there is the risk of delay and / or the property is of a particularly high value, the better lenders will try to find a valuer who can visit the property quickly and has reasonable charges.
With regards to the legals, a key difference is that the vast majority of lenders require separate legal representation for their borrower i.e. bridging lenders do not allow their solicitors to act for their borrower or vice versa.
This stems from the lender needing to be absolutely certain that the borrower is aware of the implications of their entering into the loan agreement. Having independent legal representation removes any potential conflict of interest.
Another difference with the legals is that bridging lenders’ solicitors are far more than a legal post box. UTB’s Bridging Department’s solicitors are engaged because of their ability to proactively assist the borrower’s solicitors and help drive the deal through. Our solicitors are at the very centre of the loan processing process, and their critical analysis enables us to take commercial views on legal matters as and when they arise. Also, many bridging lenders use title insurance for many if not most cases. This replaces the need for Local Authority and related searches, a common cause of delay, and the premium can often be less than the cost of such searches.
£5m Structured Bridging loans assist acquisition of student accommodation
Our customer had recently acquired a student accommodation block in a West Coast town which was unencumbered. They wished to purchase a similar property using short term finance and wished to use both properties as security to fund the acquisition.
There were multiple challenges for the Bridging Department in a short space of time to understand the nature and extremely complex structure of our customer’s business which also involves an offshore jurisdiction and several entities of differing legal status.
The legal due diligence was impressive and involved several lawyers at the Bank’s solicitors and ultimately several other solicitor firms as the Bank’s loan formed part of a wider banking and financial transaction.
Our customer drew down two distinct loan facilities to separate entities each with a principal but cross collateralised security. The loans will be repaid by long term facilities similar to those which our customer has already obtained for other units.
Staying in touch
A responsible bridging lender will stay in touch with their borrowers during the term of the loan to ensure that the exit strategy remains on course. At UTB, proactive engagement with our borrowers is a hallmark of our business and ensures that wherever possible the customer’s original intended outcome for taking the bridging loan is achieved.
Viva la difference
Short term bridging loans can be an exciting, interesting and occasionally challenging specialist mortgage product for brokers to have within their arsenal. Whilst bridging loans clearly remain a relatively niche form of lending, there are borrowers for whom a short term bridging loan IS appropriate and this has enabled the UTB Bridging Department and our broker partners to thrive. More brokers and their customers, ranging from the elderly downsizer to the sophisticated business with a varied portfolio and multi-jurisdictional ownership structure, may be able to benefit from what United Trust Bank, and the sector as a whole, has to offer.