Types of Bridging & Short-term lending
A bridging loan can be regulated, which is a first charge on a residential property, or non-regulated, which is a first charge on an investment property or properties – residential, commercial or land.
There are many ways to divide up the different types of bridging finance available, though the major variables used will be the following:
- The type of asset being used as security for the loan (Residential, Commercial or Land)
- Whether that security already has lending against it (First or Second Charge)
- Whether the security is mortgage-able or requires refurbishment or development work, and
- The level of strength of the exit strategy for the repayment of the loan itself (Open or Closed)
Residential or Commercial Bridging
Historically, lending against a commercial asset has been seen as a riskier proposition than against a residential asset and as such there are certain bridging funding lines that won’t even lend against a commercial asset and of those that do these tend to lend at a lower LTV.
It is easiest to visualize the type of security used by lenders as sitting on a “scale of appetite” with fewer lenders available as you move down the scale and a corresponding increase in cost of finance.
This scale is as follows:
Assets in declining order of acceptability
- Residential Property Non-FCA reg Complete and Mortgage-able
- Residential Property Non-FCA reg Complete and not Mortgage-able
- Commercial Property Non-FCA reg Complete and Mortgage-able
- Commercial Property Non-FCA reg Complete and not Mortgage-able
- Residential Property FCA Regulated
- Commercial Property FCA Regulated
- Land with planning permission
- Land without planning permission
- Non-property assets (Paintings / Cars / Jewellery etc.)
Lending on the best type of property will be at higher LTV’s with lower rates, and if the borrower does not need a high LTV the rates may drop further; the ideal scenario is a low LTV lend on a completed residential investment for a client with high status, a good credit history and a solid exit strategy.
Bridging on Non-Property Assets
Short-term loans on non-property assets is a very niche proposition however there are a number of lenders in the market who will consider loans on high worth items such as cars / jewellery / marine and aviation assets / paintings / wine etc.
In short, anything of value can be considered.
This is essentially pawn broking and the client will generally have to surrender the asset until repayment of the loan as the lender will store the asset themselves.
Regulated Bridging Loans
A residential or commercial FCA regulated bridging loan is any lend against either a borrower’s main residence on a first charge, the property that they are about to make their residence, against a residential property where the tenant is a close family member (two up or down the genealogical chain or one along), or a commercial use property where the borrower lives in greater than 40% of the overall square footage of the property.
The key to whether or not a property is viewed as FCA regulated is the intent of the borrower – where there is intent to move into an asset then this will be viewed in exactly the same way as if they were living there now. This is why a self-build mortgage is seen as regulated even though at the outset of the mortgage, the property is just a plot of land and hardly an asset the borrower could live in.
These types of properties can of course be used as security but the borrower will need the same type of advice as if they were taking out a normal residential mortgage. Again, certain funding lines will not lend against regulated properties due to the stigma of repossessing a main residence if the loan defaults.
The commercial bridging loan takes as security any commercial property assets such as shops offices, warehouses or any asset with commercial use. Just as certain residential properties will be viewed more positively, so certain commercial assets will be seen the same way.
A loan that takes as security a dilapidated warehouse in a bad section of town with little chance of letting in the future, is going to be viewed differently to an un-let office on canary wharf that has a tenant lined up. Lenders will assess the “risk profile” of any loan requirement against a commercial property which has a low demand as high and therefore monies lent against it will be at a lower level and a higher rate.
Most bridging loans are actually used when a property cannot be mortgaged with a long-term loan (for example a buy to let mortgage), due to the current state of the property. As the cost of bridging finance is high, people don’t normally want to use this form of funding unless they have absolutely no choice; but if a property cannot be mortgaged then this means they do not have that choice.
Bridging finance is increasingly used these days for refurbishments of property, for example a fire damaged residential property bought at auction that needs a small amount of money spent on it to increase its value and following which it can be re-sold or refinanced at a higher value. As a general rule, light refurbishment bridging loans will be at a better rate than heavy refurbishment bridging loans and will lend to higher LTV’s. Residential refurbishment bridging loans will be less expensive than commercial refurbishment bridging loans.
Following a development or refurbishment, when the property is complete a lot of lenders also allow the borrower to take out a further draw of funds on the increased value of the property to release some of the monies put in to do the refurbishment works. This is generally done when the property is being marketed for sale.
It is worth stating here that most bridging lenders need the borrower to have the refurbishment funds on account prior to helping them acquire the property so they will generally need 30 to 35% to contribute towards the purchase price and also the full costs of works.
This means that in practice the borrower needs a good level of money to be able to affect these types of refurbishment schemes.
Open or Closed Bridging Finance
This distinction in the type of bridging is based upon the likelihood and speed of the loan being repaid.
An open bridging loan is one where the exit or repayment method is known but not yet fully organised, for example, the sale of a property that is currently being marketed. A closed bridging loan is a loan where the exit or repayment method is fully organised, for example, where contracts have been exchanged on the sale of a property but completion is yet to occur.
Closed bridging finance is seen as a much less risky form of lending and hence the rates tend to be more attractive than with open bridging finance.
The exit strategy of a loan will be looked at in much greater detail by any lender with open bridging; lending is possible but the feasibility of a refinance (where that is the exit) will normally have to be proven before the bridging will complete.
If a lender is basing the exit strategy solely on the sale of a property when the borrower is unable to get a refinance due to adverse credit history, then they will have to be fully convinced that the local property market is strong enough to achieve the sale within their loan period.
First or Second Charge Lending
Any lender will prefer to have the first charge against an asset; the first charge holder has the primary call on the asset’s value in case of any issues with the loan itself.
In the worst-case scenario where a loan has ultimately gone to repossession of the asset the first charge holder will be redeemed first from any proceeds of the sale of the security. As a consequence, the first charge bridging loan is seen as a lower risk with correspondingly more attractive rates. The lender who sits in second place in the loan hierarchy has to go through more procedures when putting the loan into place so these types of loans also tend to take longer to implement.
The main procedure that a second charge lender will have to go through is to obtain “Cap and Consent” before they are prepared to lend. This means that they will need to get consent from the first charge holder to sit behind them, and also that they will want the first charge holder to agree to cap their lending at its current level.
The second of these two requirements is to prevent their equity from being diluted if for example the first charge holder was to increase their own loan. As a result it is difficult to arrange second charges behind property development or equity release loans that will generally not agree to cap their lending level.
Second charge bridging loans can in some circumstances be very similar to personal secured loans that by their nature are almost invariably second charges. If the bridging loan is for a personal purpose rather than a business requirement (and there are now exceptions such as borrower’s high net worth) then exactly the same CCA regulations apply, such as the “cooling off” periods.
Bridging on Land and Development Sites
To take out a bridging loan on land with or without planning permission is a very restricted market in the UK currently. Ever since the banks and niche lenders suffered heavily with “land banking” at the recession there have been very few lenders who will consider this. As a general rule, the lender will only get involved at 50 to 65% of the value of the land and only when there is a realistic chance of their exit through planning permission being obtained and then a refinance, sale or build-out of the project.