The Lowdown on Bridging Loans

[3 mins read]

 

If you’re new to bridging financeIn Real Estate a Bridge Loan is a short-term loan that is used to cover a funding need until a longer-term arrangement can be put in place. People bridge for a number of reasons; to purchase an asset quickly (perhaps at auction), to re-furbish a property (add value), to purchase a property from a receiver / foreclosure, or if a property is not yet financeable by a traditional lender (fire damage is one example). Bridging is more expensive, due to its shorter term nature, and perceived higher risk. The repayment source or Exit Strategy, is normally sale of the asset or Re-finance (once value is added / works are completed). you’ve probably been warned to err on the side of caution.  As the name suggests, Bridging LoansWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More are designed to help bridgeIn Real Estate a Bridge Loan is a short-term loan that is used to cover a funding need until a longer-term arrangement can be put in place. People bridge for a number of reasons; to purchase an asset quickly (perhaps at auction), to re-furbish a property (add value), to purchase a property from a receiver / foreclosure, or if a property is not yet financeable by a traditional lender (fire damage is one example). Bridging is more expensive, due to its shorter term nature, and perceived higher risk. The repayment source or Exit Strategy, is normally sale of the asset or Re-finance (once value is added / works are completed). short termThe period of time agreed between Lender and Borrower, at the end of which the Loan should be repaid or an extension negotiated. Also known as Loan Term. illiquidity, or fund properties that can’t be financed through other channels.  Amongst other benefits, they can allow you to purchaseThe act of buying something from another person, or in property terms, buying a property from another person. a property before selling an existing one, buy a place in need of refurbishment, or facilitate a quick move when speed is top of your agenda.  Interest ratesThe proportion of the overall Loan that is charged to the Borrower as Interest by the Lender. This is normally expressed as an annual percentage of the remaining loan. are higher; hence the habitual warning tag, but the potential upsides normally outweigh the increased funding costs.

The market has changed exponentially in recent years, and with the right contacts and expertise, Bridging LoansWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More can pack an effective punch when it comes to expanding your property portfolio.  From upgrading to downsizing, they’re a handy card to hold, reflected by their increasing popularity among property investors.  Like all markets, each lenderA company or person that lends money to another. has their pros and cons, so the key is having an in-depth understanding of the market, and the know-how to select the best lenderA company or person that lends money to another. for your scenario.

 

Unravelling the bridging market

Since the financial crash, the bridging market has grown at an explosive rate, with around 100 lendersA company or person that lends money to another. now competing for their share.  To fully understand the bridging market, it’s essential to drill down to the lendersA company or person that lends money to another. and how they are individually funded, which unbeknown to many, frequently comes back to the big banks.

Tightening credit restrictions from 2008Used to refer to the 2008 Financial Crisis (or Crash), which is recognised as the worst financial crisis since the 1930's depression. With its origins in the US sub-prime mortgage market in 2007, it counted established industry titans such as Lehman Brothers and Bear Stearns among its casualties, leading to government bailouts of banks around the world and protracted economic downturn. meant bankers were subject to increased regulatory and compliance requirements, making granular transactions more difficult to execute profitably. At the same time, the banking industry needed some positive PR, as banker bashing became the press’ favourite pastime.  Banks couldn’t be seen to be repossessing homes or frequently putting companies into liquidation, so they needed to find a way to lend without doing so on a piecemeal basis that wasn’t profitable, and left them exposed to press scrutiny.

 

The rise of wholesale lending

This all made way for a substantial increase in wholesale lending for Bridging LoansWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More, which saw the number of lendersA company or person that lends money to another. multiply at a rapid rate.  So, how does it work?

One way it starts is with a HNW individual or family lending money to their network for property deals. By building a good reputation, the demand for funding normally outstrips the supply of money, so they turn to a mainstream or challenger bankThe UK banking sector has historically been dominated by the 'Big Four' of; HSBC, Barclays, Lloyds and RBS Group. Newer entrants have concentrated on areas that are underserved by the more established players, such as; Development Finance, Commercial Mortgages for SME's and Residential Mortgages that cannot be easily automated (such as those for older applicants or the self-emploted). Challenger Banks include; One Savings Bank, Metro, Oak North, Aldermore, Shawbrook and Starling. Although their loans are more expensive, you are less likely to get a 'computer says no' as loans have more manual underwriting input than the Big Four (in our opinion). to provide a wholesale funding line.

Here’s an example.  A family business has £20m to lend, and are happy to offer 70% LTVThe ratio of debt to property value, expressed as a percentage; for example a Borrower that obtains a Loan of £ 6,000,000, against a property value of £ 10,000,000, would be expressed as 60% LTV. per transaction. It’s a risky business because if just a couple of loansWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More run past their agreed loan termThe period of time agreed between Lender and Borrower, at the end of which the Loan should be repaid or an extension negotiated. Also known as Term., or become an NPL (Non-Performing Loan) they can no longer lend to new borrowersThe person, persons, or commercial entity applying for the Loan from the Lender.. Reputation is key in the bridging industry, so offering termsThe period of time agreed between Lender and Borrower, at the end of which the Loan should be repaid or an extension negotiated. Also known as Loan Term. on a case and failing to complete could be catastrophic for a business reputation, so lendersA company or person that lends money to another. are keen to raise as much capitalThe value of a financial asset in monetary terms. See Capital Value. as possible to expand their offering.

In this example, the family office could obtain a wholesale funding line of around £50m, more than trebling their lending capacity to £70m. The funding line sits senior to their £20m.  If the bridging lenderA company or person that lends money to another. only lends at 70% LTVThe ratio of debt to property value, expressed as a percentage; for example a Borrower that obtains a Loan of £ 6,000,000, against a property value of £ 10,000,000, would be expressed as 60% LTV., and £70m is deployed, the property value used as securityAn Asset used as Collateral for a Loan. would be £100m, so the bank is at 50% LTVThe ratio of debt to property value, expressed as a percentage; for example a Borrower that obtains a Loan of £ 6,000,000, against a property value of £ 10,000,000, would be expressed as 60% LTV. and feels sufficiently de-risked.

The bank also only has exposure to one borrowerThe person, persons, or commercial entity applying for the Loan from the Lender.. If it all goes wrong, the bridging lenderA company or person that lends money to another. has to pick up the pieces, not the bank sitting in the background, so it’s a no-brainer for the bank and a win-win for both lendersA company or person that lends money to another..  What’s more appealing for the bank; to lend £50m once, or to lend £500k to 100 different borrowersThe person, persons, or commercial entity applying for the Loan from the Lender.?

 

Scratching beneath the surface

Whilst the benefit to you as the borrowerThe person, persons, or commercial entity applying for the Loan from the Lender. is more choice when it comes to bridging financeIn Real Estate a Bridge Loan is a short-term loan that is used to cover a funding need until a longer-term arrangement can be put in place. People bridge for a number of reasons; to purchase an asset quickly (perhaps at auction), to re-furbish a property (add value), to purchase a property from a receiver / foreclosure, or if a property is not yet financeable by a traditional lender (fire damage is one example). Bridging is more expensive, due to its shorter term nature, and perceived higher risk. The repayment source or Exit Strategy, is normally sale of the asset or Re-finance (once value is added / works are completed)., it makes it all the more important to understand how your lenderA company or person that lends money to another. is funded, as delays and reversed approvals can be extremely costly.  Essentially, you could still be borrowing from a mainstream bank, who underwrites the loanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More for the lenderA company or person that lends money to another., without knowing it.  It’s an important nuance to understand as problems can arise with changed pricing, reduced leverage of declined applications when you’re already a long way along through the process.

The difference is, the good bridging lendersA company or person that lends money to another. will still have enough of their own money to execute on deals where the funding line is not available, or have multiple funding lines where risk appetite is diversified. The thin equityThe difference between the debt and the asset value; the part that the Borrower actually owns. The equity value can increase in value over time, if debt is reduced and / or the property increases in value. The reverse can also happen. See Negative Equity. lendersA company or person that lends money to another. are essentially mainstream lendersA collective term used to apply to the mainstream UK Mortgage Banks. Generally good for simple loans up to £ 1m. Above £ 1m there may be better options in the Private Banking or Specialist Lender sectors. Also known as High-Street Lenders or Retail Banks / Lenders. under a different guise and will give you little deviation from their standard criteria.  So, dig deep yourself or work with an expert with the experience and knowledge to navigate the market.

 

Shopping the bridging market

Here’s a breakdown of the types of lendersA company or person that lends money to another. you could explore to secure bridging financeIn Real Estate a Bridge Loan is a short-term loan that is used to cover a funding need until a longer-term arrangement can be put in place. People bridge for a number of reasons; to purchase an asset quickly (perhaps at auction), to re-furbish a property (add value), to purchase a property from a receiver / foreclosure, or if a property is not yet financeable by a traditional lender (fire damage is one example). Bridging is more expensive, due to its shorter term nature, and perceived higher risk. The repayment source or Exit Strategy, is normally sale of the asset or Re-finance (once value is added / works are completed).:

 

Mainstream lendersA collective term used to apply to the mainstream UK Mortgage Banks. Generally good for simple loans up to £ 1m. Above £ 1m there may be better options in the Private Banking or Specialist Lender sectors. Also known as High-Street Lenders or Retail Banks / Lenders. & private banksBanks that cater for HNW clients. Typically they will offer Mortgages as well as Asset Custody / Management (AUM) and Wealth Management services. Most will have minimum requirements to become a client, whether that be a certain annual income, NAV or immediate AUM (or a combination of all of the above). They will generally have a better understanding of clients that have more complex income (multiple sources and / or jurisdictions).

Good for: Cheap rates.

Bad for: Being slow and risk adverse.  The lander’s lawyer may not be used to dealing with Bridging LoansWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More regularly, resulting in delays. Private banksBanks that cater for HNW clients. Typically they will offer Mortgages as well as Asset Custody / Management (AUM) and Wealth Management services. Most will have minimum requirements to become a client, whether that be a certain annual income, NAV or immediate AUM (or a combination of all of the above). They will generally have a better understanding of clients that have more complex income (multiple sources and / or jurisdictions). may need assets under management.

 

Challenger banksThe UK banking sector has historically been dominated by the 'Big Four' of; HSBC, Barclays, Lloyds and RBS Group. Newer entrants have concentrated on areas that are underserved by the more established players, such as; Development Finance, Commercial Mortgages for SME's and Residential Mortgages that cannot be easily automated (such as those for older applicants or the self-emploted). Challenger Banks include; One Savings Bank, Metro, Oak North, Aldermore, Shawbrook and Starling. Although their loans are more expensive, you are less likely to get a 'computer says no' as loans have more manual underwriting input than the Big Four (in our opinion).

Good for: Still cheap rates but normally better leverage than the mainstream lendersA collective term used to apply to the mainstream UK Mortgage Banks. Generally good for simple loans up to £ 1m. Above £ 1m there may be better options in the Private Banking or Specialist Lender sectors. Also known as High-Street Lenders or Retail Banks / Lenders..

Bad for: Being slow. Lawyers may not be familiar with Bridging LoansWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More, resulting in delays.

 

Specialist lendersWe use this term collectively to describe non-Mainstream Lenders; predominately Private Banks, Challenger Banks and Alternative Lenders. The Big 4 UK banks tend to serve the ordinary Borrower very well, but for anything a little more complex that can't be automated, then it's often the case they are not the best solution.

Good for: Ability to transact quickly. Normally working with lawyers who are experts in bridging financeIn Real Estate a Bridge Loan is a short-term loan that is used to cover a funding need until a longer-term arrangement can be put in place. People bridge for a number of reasons; to purchase an asset quickly (perhaps at auction), to re-furbish a property (add value), to purchase a property from a receiver / foreclosure, or if a property is not yet financeable by a traditional lender (fire damage is one example). Bridging is more expensive, due to its shorter term nature, and perceived higher risk. The repayment source or Exit Strategy, is normally sale of the asset or Re-finance (once value is added / works are completed)..  Flexibility (if they still have their own pot of money or thick equityThe difference between the debt and the asset value; the part that the Borrower actually owns. The equity value can increase in value over time, if debt is reduced and / or the property increases in value. The reverse can also happen. See Negative Equity.).

Bad for: Some are wholesale funded with little autonomy, which could slow things down.

 

Individuals/family officesUsed in Development Finance and for Commercial Mortgages, to describe any asset which is to be used as office space. (not funded by wholesale)

Good for: Full flexibility and delivering on hard money loansWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More.  The quickest option, and rarely reverse lending decisions.

Bad for: Normally more expensive rates but if speed is your priority, you can’t get quicker than this.

 

As always, our advice is to shop around to find the best property finance solution for you, and if you don’t have the time or ability to do this yourself, consult an expert.

If you’re not sure how a Bridging LoanWhen something is borrowed by one person / entity from another. Normally it refers to money, and a rate of Interest is charged whilst the debt remains outstanding. More could help you, have a read of our earlier blog, 10 things you need to know about Bridging Loans for some great examples.

 

 If you would like to talk to us further about bridging financeIn Real Estate a Bridge Loan is a short-term loan that is used to cover a funding need until a longer-term arrangement can be put in place. People bridge for a number of reasons; to purchase an asset quickly (perhaps at auction), to re-furbish a property (add value), to purchase a property from a receiver / foreclosure, or if a property is not yet financeable by a traditional lender (fire damage is one example). Bridging is more expensive, due to its shorter term nature, and perceived higher risk. The repayment source or Exit Strategy, is normally sale of the asset or Re-finance (once value is added / works are completed)., please give us a call on 0207 846 0184 or email info@propertyfinancegroup.com

 

 

 

 

November 2019