This week, I’d like to focus on those products that do not strictly fit within the definition of bridging finance (i.e. they have a term of over 12 months), yet are not quite ‘term’ loans (typically five year min term). There are several ‘bridging’ lenders offering these short-medium term loans, including (but not limited to); Omni Capital, United Trust Bank, Dragonfly and Shawbrook Bank, to name but a few. With rates traditionally cheaper than your typical bridging deal, but still way-off being as cheap as longer term mortgage finance (typically priced between 6.99 per cent and 9.99 per cent per annum), exactly who are these medium term deals aimed at?
Well, if we look at the Omni Capital product first off, it is described as a ‘High net worth Buy to Let’ product, so the clue is in the title!
The product is aimed at HNW individuals or corporate borrowers, with a minimum loan size of £500,000 and only available to properties located in London and the South East of the Country. There is also a minimum property value of £750,000, which clearly does not make this product suitable to the main-stream borrower. As Omni Capital are currently not able to offer regulated loans, it is only available to property investors, offering first charge against residential investment property only. My personal experience of this product is one that is therefore likely to attract overseas or foreign investors, keen to capitalise on the sought after, prime Central London properties, during this time of rapid capital growth in the Country’s Capital.
Along a similar theme, is Dragonfly’s offering, which enables borrowers to take a buy to let product priced at 8.99 per cent pa for either two or three years, or a four or five year BTL product priced at 8.49 per cent pa. Both products give the borrower the ability to defer two per cent off of the rate, until redemption of the loan, which gives a pay-rate starting from 6.49 per cent on the four or five year product and 6.99 per cent on the two or three year deal.
Like the Omni deal, the product carries a three per cent facility fee (versus a typical two per cent facility fee on standard bridging deals with a max term of 12 months or less) and unlike a standard bridge, these short-medium term products also carry Early Redemption penalties (ERCs), therefore they would not be suitable for clients looking to buy, refurbish and then sell the property for a quick profit, but are aimed more at clients looking to retain the property as a rental investment.
Why not then just take a cheaper, more conventional, high street buy to let product?
Well one reason is because the borrower does not fit the criteria of the main-stream lenders. This could be as they are non-domicile in the UK, are paid in foreign currency, are corporate borrowers, which could also be based offshore or have complex structures involving several different companies all based in different offshore Countries, involving Trusts etc.
One other reason is these products usually enable borrowers to combine servicing the debt via rental payments received, but if there is a shortfall in rent serviceability against the mortgage payment, borrowers have the ability to borrow the shortfall from the lender, by way of an additional capital loan, which is retained by the lender and used to cover any shortfall in rental income. Another feature that is not possible with more conventional buy to let propositions on the High Street.
The maximum loan size is also a big difference, with Dragonfly offering loans up to a maximum of £25 million, with larger facilities being considered on a case by case basis.
Once again, these products demonstrate how the short-term finance sector have reacted to the lack of liquidity and appetite for higher risk deals, by adapting to fill this funding void and pricing their products accordingly, at higher than High Street margins, to reflect the increased risk they are taking in offering these loans.
If you haven’t considered these products yet, then I suggest you check them out, as they are a perfect fit for some clients that would otherwise be left in a situation where they are unable to source funding and where a traditional 12 month bridging loan just doesn’t offer a long enough term.