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Submitted by Collette Royal
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Bridging loans have come into their own as a form of finance for the enterprising and shrewd borrower. The bridging market has grown exponentially over the last few years and is now estimated to be worth over £2.5 billion and growing at 25% per year. Although it still has a role to assist borrowers release cash quickly it is increasingly being used to help property developers and investors.
As well as traditional uses for bridging loans, such as residential property, there are lenders who will fund semi-commercial and full commercial properties. This is despite commercial property being perceived as having an increased risk factor. Although the risk has not diminished , the demand for this type of borrowing has forced lenders to respond. This demand is fueled by the growth in interest in commercial property by professional investors, and the rising incidence of businesses getting into financial difficulties, thus needing to raise capital quickly.
Because bridging lenders take a flexible approach to clients with bad credit they will not usually require a credit check, however they will always need to be satisfied that the property being offered as security is suitable.
There have been a multitude of new entrants to the bridging market which has forced some of the more established lenders to re-shape their lending policies. The old, tarnished image has been eroded with new dynamic lenders who are willing to utilize the latest IT advances and employ the highest levels of customer care taking their place.
At the core of all bridging loans is the ratio of the loan amount compared to the value of the asset, usually referred to as the Loan to Value(LTV) and this is the single most important criteria when a lender considers a proposal for finance. This is partly why brokers are used for the majority of bridging loans. A broker will know which bridging lenders will require a credit check and which will consider applications from clients with bad credit histories, this means that a broker should be able to help find the right type of funding.
Some of the more common uses of bridging finance include:
Auctions:
If a person buys a property at auction they have to complete the purchase within 28 days. Using a mainstream lender it would be almost impossible to organize drawdown of funds in time, however bridging loans can easily be arranged in this time frame.
Buying Property at Undervalue:
Approaching a mainstream lender with a proposal to purchase a property at under value is pointless as they will only consider the purchase price. However bridging loans can be raised against the value of the property and not the purchase price. This means that theoretically it is possible to purchase a property at discount without putting any money into the deal.
Debt Relief:
Business people often get into financial difficulties due to cash-flow problems. These can be a result of trading problems or even unexpected tax demands, where there is equity in a freehold property bridging loans are an ideal solution.
Currently there is no Code of Practice, or indeed any self-regulating body to govern the activities of bridging lenders, although there have been several attempts to form one. The Council of Mortgage Lenders (CML) will accept bridging finance lenders as members, as will the National Association of Commercial Finance Brokers (NACFB) but neither organisation is geared to examine the specifics of bridging loans. Where the loan is required to assist with the purchase of a family home the Financial Services Authority (FSA) have very strict controls over who can lend money and under what terms.
Just like a conventional mortgage, bridging loans carry some serious legal consequences should a borrower not make payments, or fail to clear the loan at the agreed time. One clause to be on the look out for is one which entitles the lender to charge excessive penalty interest if any payments are late, although most will make a charge, it should be reasonable. It is also important to make sure you fully understand the implications of redeeming the loan early.
Most bridging lenders are now well organized, customer focused organizations, the on-going threat of increased regulation has seen the death of some of the unsavory business practices which means that bridging loans should continue to be a valuable tool.
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