Bridging finance for your customers

CPD
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Gavin Seaholme Head of Sales - Property Finance, Shawbrook Bank
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19th July 2021
adviser with couple

The learning objectives for this article are to:

  • To gain a deeper understanding of the bridging market
  • To learn how bridging finance can give you flexibility
  • The difference between regulated and unregulated bridging
  • To identify what bridging finance can be used for

Bridging finance "The Market"

Bridging finance has evolved and grown in recent years to be an effective solution for savvy property investors looking to maximise an assets potential by moving quickly. More recently, the pandemic - along with the first national lockdown - naturally caused the UK property market to slow, but as it reopened and adjusted to the new normal, we saw a significant recovery in the number of transactions supported by bridging finance.

Recent data from the Association of Short Term lenders (ASTL) reported bridging completions were down to £2.88bn in 2020 compared to £3.99bn in 2019, conversely bridging applications actually grew by more than 11%. The positive shift in applications started in Q3 up by 25.7% and continued to grow at pace into Q4 with an increase of 39.1% on the same period in 2019. These numbers are a clear indication of the recovery of the property market as investors have responded positively to the progress of the vaccine roll out and the lifting of restrictions. Based on current trends we expect bridging to go from strength to strength and, given the current trajectory, it is estimated that the market could reach a size of £14-15bn by 2025.

Flexibility in times of uncertainty

One of the benefits that appeals to investors in this market is the flexibility it brings - particularly useful in uncertain times. With some properties staying on the market for longer, bridging can provide the vital capital that investors need to pursue additional opportunities to expand their portfolio, or those that need more time to achieve maximum value by selling in a more certain marketplace.

Flexibility is crucial to many investors, allowing them to react quickly to opportunities in the market, and the product itself delivers this in the shape of a short term solution with terms ranging from 1 month to 36 months. In order to find the right solution, it is essential to understand the needs and requirements of the client, as well as their strategy, given that products vary greatly.

The Myths

Bridging finance is expensive and involves excessive fees and charges?
NO. Bridging rates are low, and fees are not excessive, with products available with no exit fees or ERCs and very accessible with banks and lenders active in this space.

If Bridging finance is/has been used there must be a problem?
Over recent years investors use bridging as a smart way to access funds quickly to help support their strategy.

Lack of transparency
With any product, make sure you and your client are aware of any fees and charges, but everything a lender provides should be clear and transparent with no hidden fees or charges.

It's too complicated - I don't understand it
Bridging is a specialist lend and with more investors having greater access to the product, look to a specialist lender or packager with the expertise to support you throughout your customer's property journey.

Bridging should be considered a strategic way to leverage investments for any landlord looking to grow their portfolio or property business. Property values are looking positive and tenant demand is going up. Given the strain on supply of rental properties, now is the time for investors to use bridging to take advantage and capitalise on the opportunities as and when they arise. The ability to react quickly is key. With competition amongst lenders at an all-time high putting downward pressure on interest rates, bridging has become more accessible and affordable and is now considered as standard practice for sophisticated investors looking to maximise returns. Making sure a clear and viable exit is the key factor when considering bridging finance - this can be by way of sale or refinance into a long term solution.

What is the difference between regulated and unregulated Bridging?

  • Regulated bridging loans are regulated by the Financial Conduct Authority (FCA) and are secured against a property that is currently, or will soon be occupied, by either the borrower or an immediate member of their family.
  • Unregulated bridging loans are used for an acquisition of a property for commercial use only and are not regulated.

What can bridging finance be used for?

The key is understanding the investors needs and what the considerations are. For example with an auction purchase, investors looking to grow their portfolios are often under time pressure to move quickly, but at the same time they must ensure the bridging finance is in place to be able to proceed with an acquisition.

Other scenarios
Refurbishment – This can be "light" or "heavy" with lender definitions varying on how they apply their criteria:

  • Light Refurbishment is usually anything that is non-structural and would normally be redecoration ie new kitchen and bathrooms with the works completed within 6 months.
  • Heavy Refurbishment – This is used by investors with experience to create and add value to an asset. This is another area that clients can maximise an assets potential by creating HMOs, Commercial to Residential Conversion and can be anything from high street units through to large office conversions. Don't default to thinking that these are purely for development finance or that there are no options for your clients – there are!

Unregulated bridging uses

  • Developer exit
  • Capital raise
  • Light refurbishment
  • Auction purchases
  • Planning gain
  • Heavy refurb
  • HMO conversions
  • Multi-unit blocks
  • Commercial to Residential
  • Single dwelling refurbishment

Regulated bridging uses

  • Chain break
  • Light refurbishment
  • Capital raise on current property to fund the onward property purchase
  • Downsizing
  • Auction purchase
  • Divorce settlement

Conclusion

For a professional landlord or investor, knowing where you stand and having a clear solution in place from day one allows you to plan your next steps. Whether the aim is to let the property out or sell to raise funds for your next project, the cash flow benefits of bridging are clear. Seek out a specialist lender who will work closely with their brokers to gain a deep understanding of the client's immediate and longer-term priorities in order to find an effective bridging solution. The market has seen a significant uptick in the number of clients looking for a bridging loan, and it is the lender and broker's role (and responsibility) to ensure that customers feel supported from the beginning, working with them to understand what potential the future holds.

Bridging finance is not a solution that should be dismissed and should always be considered for clients looking to maximise opportunities. The market is ever evolving and while bridging is becoming more mainstream, it still very much retains a specialist edge.

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To recap, this article has helped you...

  • To gain a deeper understanding of the bridging market
  • To learn how bridging finance can give you flexibility
  • The difference between regulated and unregulated bridging
  • To identify what bridging finance can be used for
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