Bridging Watch: Don’t forget the chain breaker
The growth and evolution of bridging lending in recent years has been dramatic. According to the Association of Short Term Lenders, in 2012 annual completions stood at £885m. Today the figure is more than £4bn and applications hit record levels in Q3 this year, exceeding £6bn.
Much of this growth is a result of product innovation as finance has been adapted to provide a flexible solution to a range of circumstances. However, there is growing demand for a more traditional use of bridging to fix broken chains.
Ongoing political uncertainty has put the brakes on the housing market. The longer a transaction takes to complete, the greater the chance of something going wrong and, in this environment, cash is king. Cash buyers enable vendors to break the cycle of slow-moving chains and negotiate better deals.
Currently, many vendors insist that movers have sold their property before they will accept an offer; they want confirmation the finance is in place to secure the agreed purchase price before taking their property off the market. But securing the sale is not the only way to give vendors the certainty they demand. A short-term loan can release the equity from a buyer’s current property, putting them in a much stronger negotiating position: giving them a better chance of winning bids, commanding better prices, and being in a position to act and respond to the vendor’s needs as well as their own.
There are, of course, considerations. First, in simultaneously owning two properties, additional stamp duty is payable upon purchase of a second property. This can be claimed back once a buyer is able to sell their current property, but they will need to have these funds available to pay the increased tax. A bridging loan could be used to secure funds for these costs if the amount of equity available across the properties permits.
Interest and fees for a short-term loan may seem high. Most lenders charge 2 per cent on application as well as 0.44 to 0.80 per cent a month for standard first charges, and 0.75 to 1.3 per cent for second charges, if an existing mortgage is to remain in place.
However, bridging is a valuable tool and, when used correctly, most costs can be offset. The power to negotiate with finance already in place can make some vendors willing to take thousands off asking prices to get a quick sale. For example, the basic cost to raise £200,000 against a property valued at £300,000 for six months at 0.69 per cent a month could be £15,000 including lender, solicitor and valuation fees. If a buyer then exploits the improved position that a bridging loan provides and secures just a 5 per cent reduction on a £300,000 asking price, the loan cost is fully covered.
Chain-break bridging is not confined to straightforward cases. We recently arranged it for clients who were selling a pub, which included the trading business and their home. We needed a lender happy to lend on a combination of regulated and non-regulated loans, and also on a pub. The property being sold was valued at £400,000 and had an outstanding loan of £100,000. The couple planned to buy a home valued at £200,000 and therefore required a £300,000 facility to secure it.
The list of lenders was short, but we secured a loan with one that offered both regulated and non-regulated bridging. It structured a blended approach across both assets as a single loan because the client had a buyer secured, which meant there was a guaranteed exit.
There may be various ways to use short-term lending to help clients but don’t forget the chain-break bridge. It can prove useful in the current environment.
Steve Burch is short-term lending and development finance specialist at Brightstar