Bridging finance is an area of lending that is fast shaking off a legacy reputation. Historically, considered a product of last resort as rates on short-term loans were high and often accompanied by significant fees. But the landscape has changed, with an influx of lenders setting new standards and leading to more competitive pricing and product innovation.
According to the Association of Short Term Lenders, which collates lending data from more than 30 bridging lenders, bridging completions were £2.88bn last year and outstanding bridging loan books were worth nearly £4.5bn. Furthermore, applications for bridging loans were up by more than 11% in 2020 compared to 2019.
So, what is driving the growth in the popularity of bridging finance?
BRIDGING TO THE RESCUE
Bridging can be a useful tool when other avenues have failed, providing a vital lifeline to save transactions and enable clients to move quickly to make the most of new opportunities.
Chain breaks are common currently, often due to changes with lender criteria or in personal circumstances such as furlough and job losses. Losing a buyer at any time is stressful, but particularly in the current environment when so many transactions are rushing to beat the Stamp Duty Land Tax (SDLT) deadline.
In the Budget the government announced that it will extend the temporary increase in the residential SDLT Nil Rate Band to £500,000 until 30 June. And from 1 July, the Nil Rate Band will reduce to £250,000 until 30 September. So, there will be two further deadlines this year for buyers to hit and likely a surge to get transactions across the line. In circumstances where borrowers encounter a chain break, bridging finance may be able to save the onward property transaction.
In addition, a mortgage product that is applied for now is unlikely to complete before the end of June, but the average completion time of a bridging loan is usually much quicker than a standard mortgage, so in the right circumstances, bridging can assist your clients looking to beat the deadline.
NO LONGER A LAST RESORT
However, it is not just stamp duty that is driving demand for bridging – that is a very small part of it. Bridging is no longer a last resort, nowadays most used by savvy investors and business owners who recognise the benefits of fast access to flexible finance as a means of leveraging capital. More clients are discovering the benefits of buying at auction, carrying out a refurbishment and converting large properties to HMOs and multi-units.
Unlike longer term mortgages, the interest on bridging finance is rarely serviced monthly and usually paid upon exit of the loan. This means it can be used to manage cash flow, which makes it an even more useful tool.
Where finance is only needed for a very short time it can even provide a more cost-efficient option. A bridging loan can be in place for as little as three months and rates are often under 0.50% a month. This means that investors commonly use bridging to leverage capital in a way that creates wealth. For example, with refurbishment projects where the cost of the bridge is far less than the increased capital value of the property this results in a net gain for the borrower.
EXIT STRATEGIES ARE KEY
Bridging is an increasingly important tool for any advisor when structuring the optimum finance package for a client, providing a fast and flexible route to financing their objectives.
However, it is still important to choose a lender wisely and the market can appear complex for advisors more used to working in other areas of lending. For advisors who are new to bridging, or want to access additional expertise and lending options, working with a specialist debt advisor can provide peace of mind and make it even easier to deliver innovative bridging solutions to your clients.
The key for any bridging loan is to be clear about the exit strategy. This could be by refinancing onto a longer-term product, the sale of the property, or a combination of both. At Sirius Property Finance, we adhere to some very strong guidelines when advising clients on Bridging loans. For example, we will never recommend a bridging loan to a client if we do not have a clear idea of how they will exit it. It is important to have a robust exit strategy and even a back-up strategy should the first exit plan fail.
Furthermore, due to the crowded and complex nature of the market, we avoid referring a client to a bridging lender with whom we do not already have a strong relationship. This being a key area where we add value to a client’s transaction.
BRIDGING IS NO LONGER A DIRTY WORD
Bridging is no longer a dirty word, but as with all types of real estate debt, its suitability needs to be expertly assessed and a facility only entered into with a clear strategy defined. If you choose to work with Sirius to help your clients to access bridging finance, you can rest assured they will experience the highest standards available in this growing market.
Kimberley Gates, Head of Strategic Partnerships, Sirius Property Finance