October 4, 2016
Hello, and welcome to Enterprise Finance’s introductory guide to bridging loans.
I’m Paul Huxter, Head of Sales for Enterprise, and I’ll be taking you through what bridging loans are, how they work and when they can help your clients.
First, a quick introduction to Enterprise.
We’re a long-established Specialist Finance Distributor, focused on all forms of specialist secured property lending, from second charge to commercial mortgages.
We’re the UK market leader for second charges fully-supporting brokers and have relationships with most mortgage broking networks.
A major part of our business is bridging finance, which is why I’m talking about that today.
Let’s begin with a quick overview of what a bridging loan is. Simply put, it’s an interest-only mortgage with a term that’s typically maximum 12 months – although terms can be up to 3 years.
This can be on a first charge basis
Or a second charge on top of a conventional mortgage. Aggregate loan-to-value can be up to 75% - and Enterprise has brokered deals up to 100% if there’s additional security.
That money is used to pay for something. Whilst that’s normally a property purchase, it doesn’t have to be – and we’ll explore different examples later.
After a period of time, which can be as short as a few days, or up to the full contracted term, the loan is redeemed. Incidentally, there are no ERCs for this repayment. Redemption normally comes in one of 3 forms:
Sale of the secured property.
Refinancing to a conventional mortgage or BTL.
Or cash redemption from another source, leaving the secured property unencumbered.This redemption ‘event’ is known as the ‘exit strategy’.
The exit strategy is a critical component of bridging loan underwriting, alongside the LTV.
In fact, underwriters will typically look more closely at LTV and whether or not the client has a realistic exit strategy, than assessing credit or affordability, when deciding to agree to a loan.
For instance, a client with CCJs can get a bridge if their exit strategy is selling their property. If their exit strategy was to remortgage, their credit rating would make this unrealistic, so they wouldn’t get a bridge.
With a sensible LTV and credible exit strategy, a bridging loan can complete fast.
That can be as little as 3 days, though 3 weeks is more common. Either way, a key benefit of bridging loan underwriting is its speed. That makes it very useful for clients in need of fast financing.
Further, this LTV + exit strategy model means bridging loans can be applied to a wide range of properties and borrower types.
We have placed deals on almost any property, including run-down homes, commercial premises and brownfield sites. In fact, as long as it’s not a houseboat, there’s a fair chance a lender will take the deal. Further, lenders will often consider lending to limited companies, BVI and Channel Islands incorporated entities, foreign nationals, etc.
Moreover, features like an absence of ERCs and capacity to roll interest into the loan contribute to the second key advantage of bridging...
We’ll look at a range of client situations where fast, flexible finance can help solve some tricky client needs.
The classic situation – the origin of bridging loans, and still up to half of the bridging deals done today – is a broken property chain.
We’re all familiar with the flow of finance from buyer to seller to their new dream home.
When they buyer pulls out at the last minute...
...the offer on the dream home is put in jeopardy – along with any deposit they might have paid.
A bridging loan can be quickly arranged to allow the client to hold their existing property for as long as it takes to go back to market.
The bridge is secured on the new property, to allow the purchase to go ahead
The loan ‘bridges’ the gap during which their current property is sold...
...releasing funds for the bridge to be redeemed and the new home to be refinanced onto a new mortgage.
As an aside, it’s important to note that bridging loans where the borrower is or will live in the secured property are FCA Regulated Mortgage Contracts, giving all the consumer protection that that implies.
Like a broken chain, speed is of the essence in auction buying. Once a client has secured the winning bid on a property...
...they immediately pay a deposit on the day and in effect exchange contracts. But...
...that gives them typically only 28 days to complete or lose their deposit.
A fast bridging loan is a sure-fire way to do that in time, unless the client is paying in cash.
The client may well do some refurbishment work on the property, before exiting the bridging loan in one of two ways.
Either selling-on at a profit – especially with renovation work...
...or refinancing. In many cases, this will be to a BTL, but for people buying a home, this could be a conventional mortgage as well.
The bridge has effectively bought the buyer time to set-up their long-term financing.
Coupled with flexibility on property type, fast bridging finance can be beneficial for small property businesses looking to add value to properties by refurbishing.
For example, a bridge can be used to acquire an uninhabitable property – which the high street won’t lend on – if the borrower intends...
...to refurbish – putting in a kitchen and bathroom to make it habitable, for example...
...which at once significantly increases the market value of that property and makes it suitable for high street credit.Getting the bridge is dependent on an exit strategy, but in this case there are two strong options.
If the borrower is a small property developer, they can quickly re-sell the property and make up to 20% capital profit. Equally, if they’re a landlord, looking to build a buy-to-let portfolio, they’re now able to refinance to a BTL mortgage.
That flexibility extends to commercial or semi-commercial units.
Again, conversion adds value and re-sale or refinance is the valid exit route.
As another aside, a bridging loan will be considered commercial if it is expected to have >40% commercial use. Some lenders will specialise in residential or commercial, so it’s important to understand this categorisation.
Adding value to create a valid exit doesn’t just mean building works. Consider these two case example Enterprise handled.
A client had a property on a 22 year lease, and the high street wouldn’t lend any additional funds because of this.
They were able to borrow £300,000 on a bridge, to fund the cost of extending that lease to 99 years.
That took 3 months...
...but added £600,000 to the property’s value, and with a 99 year lease, the client was able to remortgage at a low 40% LTV.
Here, it was the flexibility of a bridge that counted.
When a client needed money quickly to snap up a prime property before anyone else, we arranged a £1.6M bridging loan for a Holland Park home.
Here, the client was able to establish planning permission.
That in turn added £400,000 to the property’s value, and the client resold for a cool £3M, just 6 weeks after purchase – less time than conventional mortgage financing would have taken to be arranged in the first place.
Bridging’s flexibility can make it suitable for complex deal financing, such as cross-bridging...
...where we secure bridging finance across multiple properties...
...and effectively create a linked bridge
That can then generate funds, for example to buy a new property, which can then be renovated and refinanced into a BTL portfolio or equivalent exit route.
In other situations we have development clients who have good businesses, but cash flow challenges.
Here, with lenders who charge no upfront fees, coupled with the ability to roll the interest into the loan itself...
...a small developer can do their value-adding work...
...without having to use cash on servicing the loan, then repay everything on one lump when they re-sell the enhanced property at a profit.
So, to summarise, bridging loans are fast and flexible secured property loans.
With a viable LTV and valid exit strategy, they can be used for a huge range of applications, from broken property chains to small business financing.
If you’d like to know more, drop us a line and we’d be delighted to discuss bridging with you further.