19Oct2017

Bridging in a changing market

The bridging industry is maturing and is a growing industry for those looking to access fast finance. Steve Barber, Managing Director of Bridging Finance Solutions discusses the key factors affecting the bridging sector for the following 12 months and considers the changes ahead. He commented:

A low interest rate environment has had the most significant impact on the bridging market in terms of increased liquidity, as investors with capital to invest are actively seeking alternative opportunities other than bonds and equities for example. By definition, the investments are short term and as the recovery continues this liquidity may not always be available as other investment alternatives come into play and funding may leave the sector resulting in consolidation. 

He added: “The bridging industry is undoubtedly maturing in a way that the mortgage industry did in the 80’s and is no longer a one size fits all sector. Individual firms are finding their own niche in a growing market be it by geography, loan size, security type etc. On the basis that the mortgage market is c.£220bn and a broadly quoted estimate of £3bn as the bridging market, with only 1.3% the niche sector has further to grow. In particular, we are seeing a stark differentiation in all aspects between ‘Bridging’ Firms and ‘Short Term Mortgage’ firms.

Changes to stamp duty and investment property tax relief will force further change. Steve continued: “Stamp Duty increases and investment property tax relief phased withdrawal from 2017 will undoubtedly cool the property investment market, but outside ISA’s what alternative long term investment strategies are available? Recent times have demonstrated the turbulence of equities and over a 15-20 year term, property will continue to provide for an attractive asset class. However, I expect to see a greater percentage of limited companies ‘refurbish and sell’ bridging loans as a result of the changes.”

The Government’s mission to make room for the first-time buyer will take its toll on smaller investors who will no longer see the margins and returns once expected. “Smaller investors may well drop out of the investment market but with low interest rates, wage growth outstripping inflation and Government incentives, this will make way for first time buyers which in itself makes for a healthy property market.”

Steve concluded: “As bridging moves from a niche product into the mainstream and increasingly recognised by professional advisors as a solution for clients, I expect to see considerably increased diversification of the uses of the product. The classic use of fast investment property purchase may well form a smaller percentage of a lenders overall book, as the sector levels off, but there will always be a requirement for fast, entrepreneurial funding underwritten on each individual cases’ merits.

For many accountants, the issue of tax and repayments remains a propriety. Whilst traditionally, bridging lending has been associated with property acquisitions, an increasing number of people are turning to bridging as a way of managing other short-term solvency issues. Bridging Finance Solutions are seeing an increasing number of customers using bridging to raise immediate cash flow, using property as security for the funds.

Steve explains how and why a bridge is the perfect solutions to resolve disputes with HMRC: “When financial demands from HMRC are given, they often come with imminent deadlines or stiff penalties. People are often forced to try to pull funds together quickly, disposing of assets including property, often at value far lower than market value. Clients (and brokers) are becoming more in tune with how bridging works and are using the traditional property model and applying that to access finance fast.”

Working with a North Wales based broker, BFS recently secured a £100,000 loan for Mr Hughes who was found to owe HMRC the sum.By working with Bridging Finance Solutions and the broker, Mr Hughes was able to use the equity within his home and repay the sum in its entirety to HMRC. A representative of the broker said: “By using a bridge, Mr Hughes now has the time and space to arrange long term funding allowing him to access the best mortgage possible over the long term. It also means that he isn’t forced into a ‘fire’ sale in his primary residence which may result in a lower value. “The funds were secured within 15 working days and the debt repaid. Mr Hughes was extremely happy with the way in which we worked together to ensure the deal was done quickly and effectively.”

For anyone looking to bridge, exiting a bridge forms a critical part of the initial plan. Bridging loans should be used as a short term finance solution and as part of a wider plan prior to having long term funding in place. How you exit the bridging loan is as important as entry and must be considered and determined from the outset.

Steve Barber offers expert advice on how to approach your exit when bridging: “You must have a clear exit strategy in place from the outset when bridging regardless of how you expect to use the loan in the short term be it to buy  a property, develop, or refinance.

“If for example, you are planning on clearing the loan through the sale of a property, make sure you have researched thoroughly the expected price and are realistic, even conservative in your estimates.

“If your exit strategy is based around refinancing, once improvement works are complete or you are working to traditional mortgage timescales , make sure that you are able to actually secure long term finance. Mortgages, be it traditional, buy to let or commercial, can be complex to secure with a number of criteria that require fulfilling before a funding offer is issued. BFS underwrite backwards from exit as part of its Lending Responsibly Policy, assisting the borrower in areas such as securing an offer in principle in place and checking credit rating, to ensure the borrower has a full ‘cradle to grave’ funding solution.

“Bridging loans are often used to purchase a bargain property through agents or via auction. If this is the case, homework again is key – make sure that the property really is the bargain that you think it is and has no structural or major issues that will cost you excessively in the long term. Professional lenders will insist upon an independent RICS survey to protect themselves and the borrower. This provides for considerably more comfort than an insurance premium and borrowers are going into transaction with their eyes wide open with a fully detailed survey report.

“It’s also worth remembering that many long term lenders won’t lend until the property has been owned by the current owners for a certain period of time.

“What’s most important is that you aware of all of the issues and where there is an anticipated cost, then factor it into your wider project cost.  Ensure that the sums add up and remember that a bridge is a short term solution that will often unlock the project but is not the answer alone.”

 

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