January 23, 2020
A strong ‘exit strategy’ (the term used to explain how the bridging loan will be repaid at the end of the term) is vital for a successful bridging loan application. Providing your client has a credible plan for loan redemption, it’s possible to use this form of finance to solve a wide range of short-term funding problems for residential buyers, business owners and property developers alike. To help you enhance your loan conversion rate, here’s a closer look at what constitutes a strong exit strategy, together with real-life examples of how bridging loans are put to work.
The UK bridging loan market has tripled over the last decade, thanks in no small part to the fact that this type of loan is so versatile. Arrangements are usually for up to 12 months, with loan sizes ranging across the market from a minimum of £50,000 up to a maximum of 75% of the value of the secured property.
As such, it’s worth first bearing in mind some general points regarding loan eligibility:
So, as a broker, it’s always worth approaching loan enquiries with an open mind. Rather than setting hard and fast rules on the purposes for which a bridging loan might be used, consider instead subjecting each query you receive to the following questions:
This is the essence of your exit strategy. Here’s a scenario to put this into context: a client approaches you having experienced some delay in securing mortgage approval for a purchase. They want to use a bridging loan to fund the initial purchase and then switch over to a mortgage once approval comes through. At first glance this seems reasonable – but a little digging reveals the likely reason for the delay; your client has a number of adverse credit record entries that will likely block the approval process. Unless and until these entries are addressed, the chances of mortgage approval are less than reasonable – and therefore, the exit strategy doesn’t stack up.
In almost all circumstances, a viable exit strategy will involve either resale of the property – or else refinancing through a longer-term arrangement (i.e. a mortgage). Here are some examples of strong exit strategies typically deployed for residential, commercial and property development-related purposes.
This involves the client being able to evidence a cash event within the term of the deal from another source, for example a pension lump sum or investment maturity.
The classic fix for a broken chain. Before brokers tapped into the potential of bridging finance for fixing a wider range of short-term funding gaps, there was a time when the use of bridging loans was confined almost exclusively for this purpose. The plan here is straightforward: the client’s purchase and linked sale are slightly out of sync, and you need short-term access to funds to bridge the gap. Just be sure to ascertain with certainty where both parties are with the exchange. Since you’ll know the exact date on which your client will be in receipt of funds (i.e. the completion date on the linked sale), you can opt for a closed loan – so the redemption date and completion date tally.
Your client intends to purchase a property, renovate it and then put it back on the market for resale. To check the viability of the exit plan in this scenario, you need to focus on two areas: the level of work required and the state of the market. Most likely, the client will be looking at an open loan arrangement with a duration of approximately 6-12 months. Ideally, they will have a detailed plan for the work and will have factored in sufficient time for snagging and contingencies.
Leasehold term extension. Your client intends to purchase a leasehold property on a 25-year mortgage. The mortgage application has been blocked on the basis that at the end of the mortgage term, there will be less than 50 years remaining on the lease. The client wants to use a bridging loan to fund the purchase, extend the lease and then switch over to a mortgage. This is doable - but to firm up the exit strategy, you should urge your client to make initial enquiries with the freeholder. If an agreement cannot be reached on a lease renewal, the problem would have to be resolved either by mediation, or failing that, via tribunal. The bridging loan provider will be much more inclined to approve a loan if it is clear that a protracted dispute is unlikely. With this in mind, your client should try and get an agreement in principle with the freeholder before you apply for the loan. Both your client and the freeholder will need to seek legal advice on this.
Your property developer client has spotted a time-limited opportunity to purchase a large detached residential property. They intend to convert it into multiple units for either resale or rental. Having considered your client’s existing portfolio, mortgage providers have stipulated that they cannot approve the loan unless and until planning approval for the conversion is in place and would not permit extensive conversion works to be carried out post completion.
Your client intends to use a bridging loan to fund the purchase - and then switch to a mortgage once they have the relevant permissions.
Having made initial enquiries, your client is reasonably confident of securing the local authority approvals they need. That said, there’s still a strong “fingers crossed” element to this exit strategy. To strengthen it, your client would greatly benefit from a backup; i.e. an alternative route to resale in case the planning application is rejected. Here, for instance, the backup plan might include proposals for a more limited renovation and resale as a single habitation — provided that this is realistic with reference to the market in that location.
Putting over a decade of specialist finance distribution experience to work, Enterprise Finance has access to lenders with the flexibility to consider each exit strategy on its merits, high conversion rates and quick turnarounds. To find out more about adding our range of bridging loans to your service offering, speak to Enterprise Finance today. Drop us a line today, or give us a call on 020 8731 5333.