The bridging market has experienced huge growth in recent years. Bridging lending grew by 15% in 2018 alone compared to 2017, according to the Association of Short Term Lenders, as more borrowers chose to make use of this flexible form of finance for a whole range of purposes.
The market has also become more competitive, with new lenders entering the sector and existing players diversifying their range to offer more varied products. The result of this competition has been an environment in which lenders want to lend and are offering lower rates and more flexible criteria. This is great news for you and your clients.
Bridging finance is a short-term mortgage secured against property or land that is used to ‘bridge’ the gap, until longer term finance can be arranged, or the underlying security is sold. The key to the success of short-term lending is to ensure that a viable exit strategy is firmly in place upon application. Bridging finance is available secured on a first, second or even third charge basis on residential, commercial and semi-commercial property as well as land.
It can be used for a range of purposes and is typically known as a solution to help clients who need to complete on a purchase before their existing property has been sold.
Bridging could also be used for clients purchasing a property under market value who require a quick completion, clients who want to downsize and release equity in their property to allow them to complete the new property purchase prior to the sale of their existing property, and clients who are looking to release equity for cash flow purposes on a short-term basis, for example to pay a tax bill, divorce settlement or for business use.
At Brightstar, we see requests for all of these uses of bridging finance, but three of the most common uses are for auction finance, property refurbishment and development exits.
Here’s a little more information about how bridging finance can help in those situations.
Buying property at auction can prove lucrative for smart landlords and a number of lenders offer specialist solutions for auction finance. So, what do you need to know to best serve your clients?
A major consideration when it comes to the purchase of a property at auction is the tight timescales within which a client would be required to complete. Under typical auction conditions (though this can of course vary dependant on the auction house), if a client’s bid on a property is successful, they would be required to pay a non-refundable 10% deposit on the day and would usually have a further 28 days to complete the purchase.
These timeframes can pose problems for traditional mortgage lenders, so it’s vitally important for a buyer to partner with a specialist in auction finance if they are to be successful in purchasing at these events.
The funding for the purchase of a property at auction can be structured in numerous ways, each one dependant on a buyer’s circumstances, situation and financial requirements. A specialist adviser will look to tailor a funding solution to the individual client’s needs. This could include utilising a client’s other property assets as additional loan security, often meaning that a borrower’s personal or business cash contribution to the purchase price is reduced to just the 10% deposit paid on the day of auction and the subsequent valuation and legal fees associated with the purchase.
It’s not uncommon for properties sold at auction to require an element of renovation and refurbishment. In fact, many auction buyers would be looking at exactly these types of properties in order to make a quick turn around and profit on the scheme. Though not always the case, one of the reasons these ‘project’ properties are being sold at auction is because they would typically be deemed as unsuitable security for standard mortgage lenders. In this situation, the subject property would usually require works inclusive of modernisation, the fitting of a new kitchen or bathroom perhaps or in some circumstances, a complete redevelopment of the property. This might include an extension to the existing property or a total internal restructure, for example, if the borrower intends to change a standard residential property to an HMO. It is therefore imperative from outset to understand what a client’s intentions are with the purchase property so that the client’s requirements are matched with a lender who can deliver the required light or heavy refurbishment loan facility, within the restrictive timescales of an auction. In addition, the cost of the works to the purchase property, if required, are just as important as the actual purchase price itself and must be considered when sourcing lending options for an auction buyer as the successful repayment of a loan facility can be entirely dependent on the completion of the works required.
A client should be clear about their exit strategy for the short-term loan they are looking to apply for. This would usually be via a refinance onto a longer-term product, or the sale of the property, or a possible combination of both if additional securities have been offered as part of the loan structure.
Preparation can be the key to a successful auction purchase and can significantly reduce a borrower’s risk of not being able to complete on their purchase. It’s important that a client has read the legal pack associated to any property they are considering buying, which should include information about any covenants and any planning consents that are attached to the property. This allows the client to make an informed decision as to whether or not to proceed with a bid on the property on the day of auction.
A growing number of property investors are realising that they can generate better returns by buying a run-down property and renovating it to achieve a higher re-sale price or retaining the property and benefitting from increased rental income. So, what are the options?
Property refurbishment falls into two main categories – light refurbishment and heavy refurbishment.
Light refurbishment is where no planning permission or building regulations are required and there is no change of use to the property. Since the introduction of new minimum EPC requirements on rental property it has become popular for light refurbishment to be used by investors to buy a property that doesn’t make the grade and make the required changes that would enable the property to be let out.
However, it is often the case a property that is considered uninhabitable and therefore unmortgageable could be made habitable with relatively straight forward light refurbishment, providing there is no structural work or planning required. Common reasons for a property not being habitable that could potentially be rectified with a light refurbishment include no kitchen or bathroom, multiple kitchens in a single property or a surveyor having inspected the property and deemed it not fit for letting.
Heavy refurbishments are more involved, involving structural changes to the property that require planning permission or building regulations. The returns on a successful heavy refurbishment project, however, can justify the effort and typical types of heavy refurbishment that we are currently seeing include converting a property to residential use, including things like commercial to residential and barn conversions, creating multiple units from single building or converting multiple units to a single building.
Refurbishment finance can be arranged on a flexible basis up to terms of 24 months, during which time an investor can purchase a property in need of renovation and carry out the work to increase its value before deciding whether to retain and refinance onto a longer-term solution or sell the property.
Development Exit Loans
Development exit loans can help developers to manage their cash flow while they market a completed scheme, and they are proving particularly popular in the current market, so what do you need to know?
Many developers are in a position where they are asset rich and cash poor, particularly when they near the end of completing a development. Their options at this stage depend on their intentions for the scheme.
If they are retaining the development to let out developers will usually refinance onto a longer-term solution. For those who are selling the properties they have developed, there is the option to buy extra time and release equity with a development exit loan.
A development exit loan is a short-term loan that allows a developer to refinance their completed scheme, often at a lower rate than their development finance facility. This can provide a saving on interest payment and give them more time to achieve the best sales price and most investors also release equity from the scheme to use towards future projects.
It provides developers with the flexibility to take money out of scheme before they have sold the properties and can often be completed in a matter of days.
If you are working with developer clients you are considering their options as they approach the completion of a scheme, give Brightstar a call as we can help with both scenarios.
If the developer wants to buy extra time to sell the property and is considering releasing equity as part of this process, our Short Term Lending team can source the most suitable development exit solutions available. If, on the other hand, they want to hold on to the development to let out, we can pass the enquiry onto our Buy-to-Let team who will be able to identify the best options to refinance. And, if they are undecided as to the most appropriate course of action, we can look at both options and provide the necessary information to help them make an informed decision.
If you would like to learn more about how you can work with Brightstar to help provide bridging finance solutions to your clients, call our team on 01277 561 137 or click here
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