By Alan Margolis, Head of Bridging, United Trust Bank
The bridging loan market is thriving, with multiple lenders and a growing number of brokers appreciating the flexibility and potential uses of such loans. However, the fact is that the majority of mortgage brokers and IFAs are still unfamiliar with bridging loans and how they can be employed.
The first thing to know is that the uses of bridging loans are no longer limited to the “classic bridge” of funding the gap between the purchase and sale of a property. Today, the flexibility and variety of uses are many, ranging from the “classic bridge” to multi million pound loans with multiple security properties often including complex ownership structures both off and on shore.
Choosing The Right Lender
There have never been more lenders specialising in offering bridging loans. The first task then is to choose the right lender to approach. The larger, and usually regulated lenders, will not only tend to have lower pricing, but also have more conservative loan to value limits and criteria. Given the larger lenders’ ability to compete on price, you should be able to place a 1st charge loan secured against residential property at less than 0.85% per month.
However, if your client is looking for an LTV above 70%, offers an “unusual” property as security and/or has a chequered credit history, you can expect them to pay (sometimes) above 1% per month. For brokers unfamiliar with short term lending, a good starting point is to check whether the lender is a member of the Association of Short Term Lenders (ASTL), which has a Code of Conduct, a patron of NACFB or is FCA regulated.
Behind most bridging loans is a story, which is why they do not easily fit a ‘tick box’ approach to decision making or computer modelled underwriting. Good short term lenders look beyond LTVs and a clean credit history. For them, the reasoning and logic behind requiring the loan is a key factor.
One of our more unusual loans was for a borrower who required a substantial loan to assist with the purchase of a working farm with a livery and equestrian centre and where she could also farm her pigs. The borrower was selling a property of a similar nature and wanted to purchase ahead of sale. Such specialist properties are normally outside of our lending policy, however the wider picture revealed that the sale property had a buyer and would exchange prior to the drawdown of our loan.
The “closed” nature of the bridge, combined with the borrower’s experience and financial sophistication, allowed us to green light the application on the basis of taking a second charge on the sale property and a first on the purchase property.
A key advantage of using a bespoke lender is that they assess each case on its particular merits. What may well sound the klaxons on a mainstream mortgage application may be perfectly acceptable to a bridging lender who has an actual Case Manager or Underwriter handling the case who you can discuss any issues with.
What lenders dislike is discovering something further down the line that really ought to have been disclosed at the outset. The non-disclosure of even relatively innocuous information may scupper an application because the lender will question what else has been held back. Therefore, make sure you, as the introducer, know as much of the background and quirks of the deal as possible.
On Your Marks…
One of bridging lending’s most useful attributes is speed. Other loan products may be more “appropriate” if time were not of the essence and a deadline looming, but in situations where you are against the clock, a bridging loan may well be a good solution.
In one instance we were approached by a customer who had inherited a property which was subject to a lifetime mortgage. The amount required to redeem the mortgage was determined by the last valuation placed upon it by the lifetime lender. However, as our client had subsequently undertaken works to improve the property, the amount required to repay the lifetime mortgage would substantially increase when the property was revalued, and that was imminent. Consequently he had a time critical requirement for a short term bridging loan if he was to avoid the substantial increase in the redemption value of the existing mortgage.
Although the legal situation was not straight forward and it transpired that another party in the USA had an interest in the property, the loan completed in time for the customer to avoid the substantially increased redemption figure.
Different lenders are able (or willing) to accept varying types of security, but only regulated lenders can provide 1st charges against borrowers’ residences. Where there is insufficient principal security, borrowers can provide additional or alternative security. Too often, clients and their advisors become fixated on the “target” property or a particular property that they have in mind as the security. However, there is often other property – even if owned by a 3rd party such as a family member or business associate – which can be added as a counterweight or even as a complete alternative. Be open-minded as to how a loan can be structured. A good short term lender will be too.
It won’t be long before the lender raises the question of the “exit”. A short term loan is defined by the regulator as 12 months or less, so the responsible lender will always look to see how it is proposed that the loan will be repaid within the term of the loan. Exits can come in many guises and they don’t even have to relate to the security property. For instance, the maturing of investments or inheritance income are both just as valid forms of exit as the sale or refinance of the security property.
In fact our pig farming customer lost her buyer during the application process, leaving the exit reliant on the borrower finding a new buyer for a property that our valuer suggested could require a two year marketing period. Instead we identified an alternative exit in the form of a lump sum from the borrower’s pension fund.
Remember that the exit does not have to be definitive or guaranteed, just viable and realistic.
And that’s really all there is to it. Choose the right lender from the outset, one with an experienced and knowledgeable team, and they’ll help you to provide a professional service to your client, whether it’s your first or fiftieth bridge.