Financial institutions always find ways to develop products that appeal to potential clients and drive greater profits. An example of this is when they offer flexible mortgage deals with refinancing schemes to help families own their dream homes without paying the entire sale amount upfront.
One of the most sought-after types of financing facilities that people take advantage of nowadays in funding property transactions is bridging loans.
What Are Bridging Loans?
As the name implies, bridging loans are used to bridge the finance gap between purchasing a new property and selling the one you have. They’re also called fast bridging loans because of their short-term deals, usually up to 12 months.
Unlike traditional mortgage financing, fast bridging loans are faster to arrange without basing on credit standing or salary. The loanable amount is secured against the equity of the property. Because these are more flexible than other loan types, they can be used to cover renovation projects. They’re also easy to avail of, making them a great financing option for auction property sales.
Bridging Loans In The Pandemic World
During the coronavirus pandemic, financial institutions made some changes in lending money to borrowers due to the uncertainties and economic impacts of the crisis. Now that incidence rates are declining, what’s the latest on bridging loans?
The bridging loan landscape has changed dramatically since the days before coronavirus. In April, during the initial weeks of the lockdown, a substantial percentage of lenders shut their doors and withdrew from the market. From small private lenders to major players such as Together Money, with 900 staff on furlough, the industry took a sharp intake of breath, as the shock of what was upon us became clear. With estate agents closed, viewings cancelled, surveyors unable to carry out valuations, the effects on the property industry were Armageddon like in their severity.
Through innovative changes to work practises, the willing use of technology, and a strong desire to find a way to do business, the property market and associated bridging loan industry is fighting to keep the doors and the deals flowing. The use of Automated Valuation Models (AVM), which is a mathematical and statistical modelling system to value residential properties has now been adopted by many lenders, instead of the traditional visit to the property by a surveyor. For quirkier properties, or some commercial properties, the valuers are resorting to virtual viewings and in some cases, highly sanitised viewings with all doors and windows open in the property.
How has this affected the bridging loan market:
Whilst the industry is trying to make the best of the fluid situation, there are some changes that lenders have had to make to their underwriting:
- Reduced LTV’s across the board. Although some lenders are now back at 70%-75% for residential properties, the majority are still being cautious at 60-65%.
- Less or no appetite for certain asset classes i.e retail, offices, land, speculative large scale developments, student accommodation.
- Stricter underwriting criteria. Lenders are asking more questions, looking at experience and credit profile more closely, with less appetite for any difficult deals.
- For refinances, the lending is based on the 180 day value rather than the full open market value. In happier times, for a normal residential property in a decent area, this would be the same figure. In the post Covid world, this can now be 10% less than the full OMV.
- For purchases, the lending is now based on the 180 day value or purchase price, whichever is the lower.
- Term: this is now being increased, with lenders now making typical loans of 12 months, to allow for any unexpected delays and/or a slow market.
- Exit values; when building or renovating, then end values are now being seriously depressed by the valuers, which is having a knock on effect on deal viability or equity requirements of the developer.
- Pricing: the rates have gone up across the board, with lenders now pricing for the increased risk, and indeed, the lower competition. For a 70% LTV good residential property, funding pre covid was often under 0.7% per month. This is now likely to be closer to 0.85% per month.
The bridging loan market is changing and evolving rapidly, with lenders changing their terms on a daily basis. In these uncertain times, now more ever, it is critical that a property investor engages the services of an experienced and specialist finance broker, such as Tiger Financial.
About the Author
This article was written by Matthew Dailly, Managing Director at Tiger Financial Ltd.
Matthew has been involved in property finance since 2004 and is regular contributor to specialist finance publications discussing the bridging loan and development finance sector.
About Tiger Financial
Tiger Financial is whole of market bridging loan and development finance broker with over a decade in the market. Their team works to provide short term property funding solutions across the whole of the UK, arranging market leading bespoke and flexible lending terms.
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