Specialist Bridging Lender

Introducers all recognise our market has expanded way beyond simple bridging loans for chain breaking for Mr and Mrs but are they all aware how far this journey has travelled; what’s changed, what’s new and what is better?

Residential bridging morphed to include commercial properties some way back but has continued to develop into a far more interesting product albeit in the hands of a limited number of specialist bridging lenders.

First, debt service. Retained or accrued interest limits the capital which can be released for a purchase or refinance but commercial borrowers cannot always prove their ability to service interest, even when they believe they can. Listening lenders will review the “story” and use judgement and, if they are reasonably comfortable, agree to interest being serviced, subject to a small retention, say three months, to be applied in case of need.

And Loan to Value – LTV, often the major hurdle in satisfying clients’ requirements. Turn the clock back and none of the lenders exceeded 60% regardless of the circumstances. It progressed to 65% and then 70% and now even 75%. However, it must be understood which commercial loans attract the higher limits.

At the bottom of the list is property development sites where 60% may still be considered generous by many lenders but this can be exceeded where the land loan is combined with a development facility and both are contained within 65% of GDV or 75% for stretched senior debt. Stretched senior debt is not readily available for projects with GDV under £5M but ALTERNATIVE’S new Development 90 loan covers 90% of cost and 75% of GDV with loans from £2M to £5M.

LTVs will differ dependent upon a number of factors including the quality of the borrower’s covenant, the type of property, if it is owner-occupied or a single or multi-let investment. LTV is also regulated by the exit strategy. If it is a sale, maximum can be applied, but where the loan is to be refinanced, the lender will consider if a long term loan can be obtained at a similar or slightly higher LTV.

For owner-occupied shops with upper parts, the simplest of commercial assets to review, subject to the borrower having a good set of accounts, 75% is possible. That same asset with one strong tenant will be supported at 70% and perhaps, if the tenant is really good, at 75%. In the same circumstances, office building, warehouse and industrial premises will probably not achieve more than 70%. All of this compares with 60% not so long ago.

Flexibility! Lenders and brokers talk about flexibility in underwriting and certainly that is important as very few loans have no wrinkles and just tick all the boxes. But what about flexibility after the loan has been made?

ALTERNATIVE offers an overdraft, whereby an agreed limit is established with the ability to drawn down all or part on demand, and to repeatedly repay and draw again and again. It is best secured against under-utilised commercial and residential properties and ideally suits the property industry and business community giving property developers funding to satisfy on-demand funds for working-capital, auction and other purchases, to fund construction or just to provide deposits. No bridging loan is more flexible or easier to operate.

Another innovative facility is funding the VAT on property purchases. VAT does not apply to every property purchase, but when it does it will reduce the capital available for the purchase by 20%. There are now specialist lenders who will fund this payment in isolation until it is reclaimed by the new owner and, with careful structuring, it can also be provided as an extension to the bridging loan or development facility.

The need for residential property development finance for owner-occupiers is increasing with very few lenders able to satisfy it. It is exacerbated by the need for the lender to be regulated, and many of those in the market only offer restricted terms at increased interest rates and fees.

In fact, from a lender’s point of view it is a very good opportunity. In the main borrowers have become knowledgeable of the development process and surround themselves with good professional advisers. They are also able to offer a first or second charge on their existing property as well as that to be constructed, enabling the lender to provide 100% of development cost at relatively low LTVs. Certainly there is no reason to apply penal terms.

The terms for property refurbishment loans have considerably improved over the past year with lenders combining a facility for improvements with a purchase loan. Some will go further and also include a term loan for the exit, providing continuity of funding and avoiding additional setting-up fees at each stage. However, the immediate benefit to the borrower remains the ability to revalue following completion of the works, and to borrow up to 75% of the enhanced value, so releasing equity for further investment.

Refurbishment loans fall into two categories, light and heavy, and not all lenders can consider the more demanding, heavy refurbishment projects, where planning permission and building regulation approval is required. This is usually provided by lenders who can include it as part of their development finance offer.

And what will lenders focus on next? Probably larger loans, from £5M to £20M, an under-provided sector in the bridging and development finance market. We are part of an industry that continuously evolves. Sometimes it is ground breaking but more often it is small changes to existing terms. Either way, it is essential for introducers to stay in touch with their lenders and vice versa, to remain in the front line and to ensure borrowers are offered the best arrangement. If they don’t, someone else will!

Click here to read the article in the February issue of Bridging Introducer.