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The return of the briding loan

Sheila Manchester explains how short-term loans can deliver the deal.

Sheila Manchester

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Ask anyone over 60 about bridging loans and there will be a sharp intake of breath through the teeth, rather like you receive from the guy who comes to fix your boiler. Bridging loans were popular in the 80s as everyone rushed to buy houses in a fast moving market. Older, wiser folk warned against them, rates were high and the uncertain timescales of house purchase, plus your current mortgage, created a ‘financial timebomb.’ As the decade progressed, ‘ordinary’ mortgages became costlier by the month, with interest rates rising, in 1989, to 15 per cent; adding a bridging loan was viewed as financial suicide.

Times have changed, we have recently ‘enjoyed’ incredibly low interest rates, but with the economy still struggling, few have had the appetite for increasing their financial burden and those who do are stymied by lenders’ restrictions. However, there is always a band of people who are determined to invest in property and the band is getter bigger.

The transformation of our auction rooms, from stuffy, slightly intimidating spaces flogging desolate houses, into lively, fresh and welcoming ‘events,’ complete with cheery, ringmaster-style auctioneers, has made buying at auction an increasingly popular mainstream activity.

Properties are presented ready for purchase, the gavel falls and the project is underway – assuming you have enough cash. With mortgage lenders fussy to the point of frustration, if you don’t have the cash the dream may not come true. Enter the new world of The Bridging Loan.

Gross bridging lending in the UK is expected to surpass £2.7 billion in 2014, according to a survey of 250 financial intermediaries by West One Loans. The figure for the 12 months to 1st November 2013 was £0.91 billion – so this is a 300 per cent increase.

Duncan Kreeger, Director at West One Loans says, “Bridging loans provide crucial support for credit-worthy borrowers and great ideas. In a warming economic climate, that support is vital for growth.

“Bridging has grown up over the course of the recession – just as most mainstream lenders have wandered into troubled waters. Now that the economy is picking up, all forms of alternative finance are steaming ahead – and bridging in particular is making the most of the competitive advantage won in the dark days of recession.

“Looking at the figures so far this year, brokers’ expectations are looking pretty spot on. And 2014 looks particularly exciting given how accurate the same predictions from intermediaries were a year ago.”

WHY USE BRIDGING LOANS

Bridging finance is simply a short-term flexible loan. That flexibility is the key factor, compared to attitudes at many traditional high street banks, as the loans can be lent purely against an asset so every person or business is assessed on an individual basis.

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Chris Baguley, Auction Finance

Chris Baguley, Managing Director at Bridging Finance and Auction Finance says, “The funds can be secured against residential, semi-commercial or commercial property. This can be against freehold or long leasehold property. Recently we have completed cases where
a residential development, a factory and an office have been used to secure the loan.

“The speed in which bridging finance can be arranged is also a key benefit as
we can lend in 24 to 48 hours; fast funding often gives investors a strong position to negotiate on purchase and increase the market value of a property or development.”

Archaic obstructions, seemingly embedded in traditional mortgage lenders, such as not lending on properties that don’t have a working kitchen or bathroom, are also overcome by specialist lenders like Bridging Finance, as they will fund these ‘unmortgageable’ properties that may often be found at auction.

Even more helpfully, the Auction Finance team attends many property auctions across the country, enabling buyers to get advice there and then and even funding on the day for a specific bid – no racing back to grovel to the bank manager!
Karen Bennett, Sales and Marketing Director, Commercial Mortgages, at Shawbrook Bank, says that their short term finance can be very useful in specific situations – such as when trying to secure a property quickly, like buying off-market or at auction, or to raise funds to carry out refurbishments on a property ahead of sale or rental. “It isn’t generally the cheapest form of borrowing, although it can be turned around quickly, often within a matter of weeks not months.”

WHAT FINANCING PRODUCTS ARE AVAILABLE?

Shawbrook currently offers five market- leading short term finance products, all with a maximum term of 18 months and no minimum term. “We categorise these loans as residential, commercial or mixed use and they all have a loan size ranging from £75,000-£10m,” says Karen.

“The maximum LTV and pricing differs from product to product, varying from 60-70 per cent maximum LTV and from 0.65 per cent per month to 0.83 per cent in price. We also aim to offer a breadth of options when it comes to repayment, so the interest on each loan can be paid back in a number of ways: serviced by direct debit, retained upon completion for the approved loan term, or retained for a set period with remaining interest payments serviced by direct debit. We always charge interest on the gross loan including retained interest payments.”

At Bridging Finance, loans typically start from £25,000 with no maximum loan amount; the average loan size is £67,500, says Chris Baguley. “We understand that for many property deals time is of the essence so we ensure funds can normally be transferred as quickly as just 24 hours in time for completion.

“We’ve funded some exciting developments in the past 12 months, including barn conversions for farmers, townhouse renovations in central London, the completion of luxury countryside properties and the regeneration of a 15th Century grade II listed building.”

THE BOTTOM LINE

Back in the (relatively) crazy days of the 1980s, bridging finance rates were eye wateringly high, but In recent years the rates on short term loans have become increasingly competitive – Shawbrook Bank says that it is committed to developing their market, including by setting the standard for market leading pricing.

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Karen Bannett, Shawbrook Bank

“However,” says Karen, “it’s very important for property professionals considering short term finance to understand the full costs involved and to make sure they have a clear and reasonable exit plan, either in terms of repayment
or switching to a term loan. As with any lending situation, all parties need to go into short term finance deals with their eyes wide open, to ensure expectations are realistic and repayments are sustainable.”

Bridging Finance’s rates are similar, “We provide fair rates compared to high street banks and we’ve recently launched two new low rate bridging loan products. The three-month and six-month low rate loans offer a monthly interest rate of just 0.75 per cent on a typical loan value of 70 per cent. Up to 100 per cent funding is also available with supporting security and our three-month loan has no exit fee.

So, on a three-month loan of £100,000, with a rate of 0.75 per cent per month, that means £750 per month in payments. But, says Duncan Kreeger, rates could improve in 2014, with 49 per cent of brokers expecting them to fall as competition grows, “For around half the price of borrowing on credit cards, businesses and individuals can access loans of up to millions of pounds via the bridging industry. That’s ideal for the most economically vital projects – in need of significant sums for short periods of time.”

AUCTION FINANCE CASE STUDY

We have just provided funding to Pinnacle Student Developments to transform a Liverpool city centre car park and Paramount Theatre into state-of-the-art student halls which will accommodate 430 university students.
Pinnacle Student Developments spotted the potential of the land given its city centre location, opposite Liverpool Lime Street Station and within a ten-minute walk of three university campuses. To realise its plans, the developer turned to Bridging Finance for funds to complete the purchase of the site.

Andrew Dixon at Pinnacle Student Developments said, “The city centre location of the development is excellent, so we wanted to purchase the land before other investors swooped. Having successfully worked with Bridging Finance in the past we approached them for quick and flexible funding. Thanks to its prompt and efficient processes we’ve been able to secure the land and start construction on the site.”

Chris Baguley, Bridging Finance, said, “This was a highly sought after city centre site, prime for redevelopment so we worked hard to ensure we were able to provide fast access to finance so Pinnacle could purchase the land and start the ball rolling. Many traditional high street banks have stricter lending rules and it can be a timely process. Short term funding is perfect for any property professional that needs to act quickly.”

INVESTING IN BRIDGING

Better than gold, better than art and, hic! better than fine wine.

Interestingly, while bridging loans are frequently used for property purchase or development, returns from investing in bridging loans outpaced alternative investments in 2013.

Investments in privately funded bridging loans have generated the best return among a key group of alternative asset classes in 2013, according to the latest research from West One Loans.

Private investors in short-term secured loans will have made a total annual return of 10.8 per cent over the course of 2013. This compares to 5.1 per cent for fine art, 1 per cent for fine wine, and a loss of 29 per cent for gold.

Those who placed a £500,000 investment in bridging on 1 November 2012 would have made returns of £53,800 – more than double returns from the same investment in fine art (£25,500), fine wine (£5,100), or the £144,900 loss incurred from making the same investment in gold.

February 24, 2014

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