Bridging loans can be used for almost any purpose so long as there is enough equity in the property.  The UK Bridging Loan market is estimated to be worth £2.5 billion and the demand for bridging loans is believed to be growing by 25% year on year.  Bridging finance can be made available for many purposes, the obvious one being to bridge the gap between the purchase of a new property and the sale of an existing property.

Once regarded as the funding solution of last resort, bridging finance has under gone something of a transformation over the last few years. It is no longer the preserve of the desperate house-mover but a valuable tool for savvy property investors and developers looking to secure a bargain.

The growth in the number of bridging lenders means that there is more competition, which in turn has led to more competitive rates and more innovation, particularly around the issue of exit fees and default rates. Many of the more well established lenders have been forced to change their business practices to keep up with this evolving market. Thankfully the practice of hiding crippling terms in small print will no longer be tolerated in a market dominated by brokers. .

We all know how frustrating it can be when a long chain suddenly breaks and these at the top look like losing their dream home. but there are plenty of other instances when bridging finance might be appropriate. For example an auction purchase which only has 28 days to complete, or a business which finds itself needing to find a substantial amount of tax money quickly.

Bridging Loans are often used for:

Auctions:
When purchasing property at auction the borrower usually has a deadline of 28 days to complete the process.  Although it is not uncommon for borrows to be told that it is possible to complete purchase using conventional finance in practice the funding is rarely available in time.  Having paid a 10% deposit it is vital that completion takes place within the deadline.  This is where bridging loans are most useful, once the valuation has been received legal completion can often take place within a few days.

Buying Property at Undervalue:
Approaching a mainstream lender with a proposal to purchase a property at under value is pointless as they will only consider the purchase price.  However bridging loans can be raised against the value of the property and not the purchase price.  This means that theoretically it is possible to purchase a property at discount without putting any money into the deal.

Debt Relief:
Business people often get into financial difficulties due to cash-flow problems.  These can be a result of trading problems or even unexpected tax demands, where there is enough equity in a freehold property bridging loans are an ideal solution.

One aspect of bridging loans which have caused the most concern is the perceived lack of transparency, many borrowers had complained that the rate
originally offered had been subsequently withdrawn and replaced with a much higher rate. The lender’s would counter this claim by blaming the customer or broker for not supplying accurate information at the outset.  Therefore It is important to make sure that the terms of a bridging loan are explained in clear english, worth remembering that just chasing the headline rate could leave a borrower in future trouble.

We would love to hear you views on bridging loans, good and bad!

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The [tag]Bridging Finance[/tag] market is reported to be currently worth about £2 billion per year, which would make it a significant part of the UK property finance market. Despite its size the [tag]Bridging[/tag] market is surprisingly under represented in the mainstream media.

Bridging Finance is set to continue to be a major component in the overall mortgage market, and in fact some analysts predict that it could be worth over £5 billion by 2010. One of the reasons why Bridging will remain a viable option is because it would appear to be immune to the state of the overall property market. This is because in a rising market there are plenty of property entrepreneurs willing to pay a premium to move property quickly, however in a declining market there are more distressed sales creating the need to “bridge” a shortfall.

One fascinating aspect of bridging is the role of the mainstream banks, typically they have wanted to keep at arms length from bridging finance. This is because by its very nature a bridging lender has to be willing to step in quickly to repossess a property at the first sign of trouble, something that a bank’s PR department are keen to avoid.

However, on the occasions that a high-street bank does get involved in [tag]bridging loans[/tag] it is normally in a very tightly controlled environment. What is interesting is that when a property dealer approaches an independent property finance lender they don’t necessarily realise that around 65% of the loan amount is usually sourced from a high-street lender from the wholesale markets. Not that any of this matters, but it is nice little irony.

The public image of Bridging Finance is changing as more independent lenders get involved, we would like to hear from property developers and entrepreneurs about their experiences of using bridging finance, good and bad.

Leave a comment below and let us know what you think.

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For some people, such as property developers and investors, Bridging Finance is a tool of the trade – and a very powerful one at that. Bridging Finance has the qualities of flexibility, convenience and speed of implementation. And it is the speed that makes it such an effective and valuable resource.

Bridging finance is often the only facility that can make things ‘happen’ within a very limited time span. Where else, for example, is it possible to access finance of between a few thousand and over a million pounds within a few days. Bridging lenders will proceed without the usual string of references, credit checks, accounts, CVs etc.?  The choice is either to accept the costs of bridging and open the doors to a substantial profit or abandon the project and make nothing. Obviously if the potential profit is only very small, then the relative cost of bridging could become significant. It is for the borrower therefore to assess the merits of the project and decide whether the cost of bridging outweighs the benefits.

This ability to take advantage of a profitable deal makes bridging akin to a credit card purchase. Sometimes substantial bargains can be secured simply by being in the right place at the right time. If the necessary cash is not available at the time it is still possible to make the purchase and arrange for the funds to be released at a later date. The higher than usual interest rate is considered acceptable because it has enabled the purchaser to strike a profitable deal which otherwise would not have been possible.

However, the parallel stops there because buying from a shop or a supplier carries none of the additional complications of buying a property. And this is where the costs of bridging arise. Although legal fees, valuations, etc. are an integral part of any property purchase, there is the added requirement of speed in a bridging transaction. This puts pressure on everybody involved and entails a good deal of commitment from lawyers and requires valuers to rearrange schedules and priorities. The need for contracts to be drawn up can require a solicitor to have to put other items ‘on hold’. This all comes at a premium and it is this concentrated professional activity that tends to be overlooked.

The question of whether bridging finance is expensive has to be viewed in the light of what is being requested and what it is enabling the borrower to achieve. It is, in fact, the means to an end – and often a very profitable end!

[tags]bridging finance[/tags]

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When the need for a bridging loan arises people are often concerned that a poor credit history may cause problems. Well, the basic condition of Bridging Finance is that the lender’s advance is covered by the value of the property being offered to secure the loan.

Bearing in mind that the value of the subject property will always need to be confirmed by a professional surveyor, the lender is not generally too concerned about a bad credit history even though there may be issues with poor credit such as mortgage arrears, CCJ’s and IVA’s.

Remember that we are specifically talking about bridging loans provided by lenders who are willing to lend money based entirely on the value of property. Obviously if you approach your high-street bank you will get a very different response once they discover that you have a poor credit history. Although bridging finance lenders do not concern themselves about the state of the borrower’s credit history they still need to know the background, and would take a very dim view of any attempt to hide or cover-up a problem.

Bridging loans can run from one to twenty four months and of course the lender will want to be assured that funds are going to become available to repay the loan at the end of the term. This is often referred to as the “exit route”. Some lenders have a minimum loan term although this is becoming the exception to the rule.

It’s ironic that bridging finance can be made available precisely at that time when a borrower has been under severe stress as a result of pressure from creditors or other serious cash flow problems. A bridging loan provides temporary relief at this time – making it a fast, flexible and very useful facility.

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The year 2006 has been another one of expansion for the Bridging Finance sector seeing a record number of enquiries and loan completions.  Additionally new lenders are starting to enter the short-term property finance market-place which means rates will start to fall as competition increases.

Many observers believe that this growth in Bridging Finance is a result of a combination of factors, most importantly the increasing number of property entrepreneurs who understand the benefits of the flexibility that short-term property finance offers.  The number of people trading in property has been further boosted by numerous television programmes extolling the benefits of buying property at auction.

Despite interest rate increases in the later part of 2006 and early 2007 the number of property transactions will continue to sky rocket in some areas of the UK. This is good news for investors but even better news for bridging finance lenders as investors and property developers battle for property. Another reason for the rapid growth in bridging finance is the increasing number of lenders now competing for business. As recently as 2005 there were only a handful of specialist bridging lenders who were willing to take on the risks associated with short-term funding. Now there are far more. Again this is great news for the potential borrower as it means that excessively high interest rates and rigid lending terms should no longer be the norm.

The addition of so many bridging finance lenders does have other less obvious implications for 2007. Residential mortgage brokers have had a really tough time since the Financial Services Authority (FSA) took over regulation of the industry. Many residential brokers are now turning to the commercial sector to boost their flagging incomes. Although this will help increase the awareness and availability of bridging finance, borrowers would be well cautioned the ensure that the broker they choose has the necessary experience and training to assist them properly.

Organisations such as the National Association of Commercial Finance Brokers (NACFB) are gaining in credibility and borrowers should seriously consider only working with brokers who are members. A great metaphor I once heard was that Bridging Finance is a tool, and like any tool it’s very useful when used correctly, but a danger when used in the wrong way. One thing that is certain is that you are going to hear a lot more about bridging finance during 2007

[tags]bridging finance[/tags]

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Read more about this subject here: Bridging Finance – another good year