Bridging finance - a background briefing
Fri, 26 Oct 2007
Bridging loans are expensive and risky forms of finance so you need to ensure you are well advised before taking one on.
Commercial property bridging funding is a small and specialist area of lending. Advances are driven almost exclusively by property valuation with some lenders prepared to lend almost on a non-status basis (where they do not concern themselves with checking the borrower’s ability to pay). Others are more cautious about establishing both serviceability (the borrower’s ability to pay the interest as they go) and the feasibility of the proposed exit from the bridge whereby the lender is to be repaid the capital.
As this is an area where charges are high and it is possible for lenders to make significant profits from defaulting loans, this is an area where borrowers need to take careful advice.
Bridging loans will usually be for a set period, typically of 6 to 12 months, and may be either open (where you have not established how you are intending to repay the bridging loan at that point or are intending to roll the loan over into a longer term) or closed (where a specific deal has already been set up such as the sale of the property, whereby the bridger’s loan is to be repaid).
Some lenders are developing alternative and hybrid products such as a 2 year ‘super bridge’ and a one year bridge that automatically converts to a normal 15 year term loan at the end of the period assuming that the account has been operated correctly.
For lenders, the key criteria and issues in lending are:
· valuation of the property by a professional valuer on the lender’s panel;
· the quality of the property;
· the borrower’s ability to service the borrowings; and
· the viability of the proposed exit.
As discussed above, lenders vary in the degree to which they are concerned over the last two issues.
The main players in the market lend at 75% of open market value (OMV); falling to 65% where they are lending as a second charge holder.
Facilities are usually granted for 6 months and are interest only arrangements with the loan capital repayable at the end of the term. Checking the provisions in respect of renewal of the facility at the end of the initial term is therefore critical in any open bridge.
Bridging is expensive money. As well as valuation, broker and legal costs you can expect to pay a lender’s arrangement fee of 2% to 3% and discounted interest rates of between 1.25% and 2.0% per month.
Bridging loans are usually interest only loans with the capital being repaid at the end of the period. Interest is either collected upfront by way of a deduction of the total interest charge for the facility period from the initial drawdown, or monthly in advance. In some cases it is possible to agree to ‘roll up’ interest in whole or in part to be repaid at the end of the term.
If you take out a bridge where the interest is deducted from the advance on drawdown this has the advantage that you do not need to find the cash to make payments during the period of the loan. Against this it reduces the funds you actually raise by entering into the bridge. Do not forget that at the end of the period you will need to find the cash to repay the gross amount advanced, not the net received.
The interest rates quoted above are the discounted rates for prompt payment and it is normal for the full rates to be almost double these. It is crucial that you are aware of this as in the event of default on a payment (such as failing to pay exactly on the due day), you will lose the right to pay interest at the discounted rate and will be charged at the full rate.
If you take out a bridge on a pay as you go basis you therefore need to ensure that you have sufficient funds to make all the payments on time to avoid the increased interest costs and charges that arise on default.
In the event of default, you should expect all lenders to take swift and robust action to secure their lending by way of appointing receivers to sell the building. In addition you will find that the lender will reserve the right to charge administration costs incurred in dealing with any default.
As defaults are an area in which lenders can make extremely high returns, and can recover these by appointing receivers to sell your property, you should take care that you are dealing with a reputable lender. While bridgers will generally be robust in their approach and expect to act swiftly in both lending and recovery, you should be cautious about dealing with lenders who appear to be willing to lend very aggressively or who are completely unconcerned about your ability to pay the interest or to repay the loan at the end of the term. You should also check the terms of any loan carefully to ensure that the rate and/or the basis of charges will remain set for the whole of the facility period and cannot be varied by the lender once you are signed up.
To see which lender meets your requirements use the loan finder service on this site or contact us to discuss your requirements.
