The first half of 2021 saw UK house prices soar at a pace not seen since 2014. Halifax reported an average 9.5% increase in the months leading up to June with the stamp duty holiday responsible for creating a surge in demand.
The rush to get deals over the line before the cut-off date saw many property investors look to secure bridging loans as one of the fastest property-secured finances solutions available.
Providing fast finance on a short-term basis, bridging loans can play a key role in high-stakes property deals, particularly those that need to complete at short notice. Here at Signature Property Finance, we recognise that whilst property deals are seldom straightforward and often throw up many curveballs, there are ways and means to avoid costly delays and get a bridging transaction tied up more swiftly.
Several factors should be considered upfront to ensure you are able to secure faster finance, and here are our top 11;
1) What do you need from your bridging loan? Sounds like a simple question, doesn’t it? But it is in fact quite a loaded one. Before you even approach a lender you should be very clear on your requirements. How much do you need to borrow? How long do you need to borrow it for? How much flexibility do you require? How is the money going to be spent and over what time frame?
Bridging loans are a common source of finance for major refurbishments, new builds, aesthetic improvements, and HMO alterations, to name but a few. The schedules for each of these projects would vary massively, so it is important to understand how the release of funds will impact project progress, and in turn repayments.
2) Your current situation will affect the deals accessible to you. The size of any existing mortgage agreements or the amount of equity available in any investment property/properties you wish to use as security for the loan will play a significant part. Getting updated and accurate valuations ahead of time will be crucial.
3) It’s vital to get the valuation spot-on, particularly in the case of development projects. Lenders don’t take it for granted that planning consent will be granted as is, even if it’s looking positive with the local authority. They will place a cap on the amount developers can borrow for a bridging loan based on the market value of the investment.
For example, should a lender agree to a £1,000,000 loan, but the valuation shows that the property isn’t worth that amount, the lender won’t then provide the full amount. You will need to aim for consent that delivers the greatest GDV. And to ensure a quick drawdown, ensure you’ve got the best scheme that will support the loan from the beginning.
4) You will also need to understand what valuation method a lender is going to adopt. By this we mean, do they calculate your borrowing based on open market value (OMV) of the more restrictive 180 days to sell and complete or even 90-day valuation (basically auction value)? These figures can on occasions vary by as much as 20% with Auction value being the lowest and OMV offering the highest lending potential. Different bridging lenders use different criteria.
5) Different applicants will be able to borrow very different sums dependent upon a number of things. The type and value of the property that is either being purchased, renovated, or converted affects the interest rate offered by the lender and the term of the bridging loan.
The all-important exit strategy for repayment of your loan and a ‘Plan B’ if this does not happen, must all make rational sense. If exit is ‘Sale’ but the selling market goes quiet, will the potential income from letting the property allow you to take a Buy to Let mortgage to pay off your bridging loan?
6) There are many places you can approach to secure a bridging loan, from larger banks, direct from brokers, or through specialist lenders such as ourselves who work alongside brokers to secure our customers the very best loan rates possible.
Of course, interest rates will differ wildly from lender to lender, so before making your decision conduct thorough research to ensure that not only have you chosen the loan that works best for you, but also that you are dealing with a reputable and reliable lender who has a good reputation for customer satisfaction.
7) Be sure to obtain a full breakdown of all costs involved before agreeing on a deal. There are many additional fees associated with securing a bridging loan and they need to be factored into the overall cost of the project. These may include:
· Arrangement or facility fee
· Exit fees
· Administration or repayment fees
· Legal fees (both yours and the lenders legal fees are paid by the borrower)
· Valuation fees
· Introducer or broker fees
The likelihood that you will incur these fees and the associated costs will be dependent on the lender.
At Signature, we pride ourselves on providing complete clarity when approving deals, and the numbers outlined from the outset are set in stone, meaning there will be no hidden extras further down the line. But this isn’t the case for all lenders, so it’s something to be cautious of when doing your research, so that there are no nasty surprises further down the line that will throw your deal off course.
8) You will need appropriate legal representation to support your application, but it’s important that you not only understand their fee structure but are also clear with them about your exact requirements before making an appointment.
For example, with a tradesman or contractor, you are given a fixed-price quote for work on which you both agree. You won’t pay more than that price if there are any hiccups along the way, but you will incur additional costs if you start adding extras at a later date.
Not many lawyers can guarantee the same thing, often quoting based on an hourly rate, and including clauses that enable them to make additional charges. There is limited incentive for these lawyers to close a deal quickly, which can draw out the process.
As such, our advice is to seek out a fixed-price legal advisor who will have a greater drive to get the deal over the line and will be incentivised to meet your expectations.
9) Your lender will want to be happy that, all purchase documentation is available and correct before advancing a bridging loan, so you will need to be honest and upfront about project pathways, proposed construction schedules, and potentially even preferred contractors during initial discussions as this will highlight potential areas of risk.
You may find that if you can showcase an existing record of similar developments, exact details regarding construction management might not be necessary, but lenders may be uncomfortable if the information isn’t available, which will delay completion.
Due diligence on major contractors carrying out building work is to be expected, as their ability to complete the project to the required standard and on time is critical to matching your bridging budget and facility term. On a bridging project you are only as strong as your weakest link and lenders will want to ensure that this is not your little-known builder!
10) Time is often of the essence with property deals, so be sure that both your lawyer and chosen lender knows your deadlines and check whether they will be able to deliver on time.
It is often quicker to secure a bridging loan than any other kind of finance, and the industry standard for deal completion is somewhere between two to three weeks. But remember, this is all reliant on every element of the deal aligning as it should. This is why everything we have outlined above is so important.
11) Finally, you will need to avoid overrunning your bridging facility and end up with ‘horrible’ loan extension fees and penalty interest. At Signature, to minimise the chance of such occurrences, we always look to offer a 10% contingency to anticipated build costs and allow a healthy 6 months to sell the property once built or renovated.
If you are with a reputable lender, then usually once you have had a loan for 90 days or 6 months, you will only ever be charged for the money that you have used and the time that you used it for (win/win) . So taking the ‘Belt and Braces’ conservative approach can save you potentially a lot of money and heartache.
Just remember, if an initial quote looks too good to be true, it probably is. Never approach any bridging opportunity with ‘rose coloured glassed’ please ensure that you have correctly focussed eye-ware in place and always build in the ‘what if’ factor.
When you are well prepared, have asked the right questions, have researched and prepared yourself thoroughly, and assembled the correct team of solicitors and tradesman around you, then chances are the transaction will go swiftly, smoothly, and without any unpleasant surprises.
If you are researching bridging loans and have an expected need, we are more than happy to discuss your next project and explain the difference getting a Signature on your next loan application can make. Please get in touch today and unlock the potential in property.