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publication date: Sep 11, 2006
author/source: Chris Baguley
The Council of Mortgage Lenders (CML) recently released figures suggesting that bridging finance lending is set to exceed £3 billion in the next twelve months. This figure is not surprising and simply highlights the popularity and growth this form of lending is currently experiencing. However, to achieve this, many bridging finance lenders have had to up their standards and perform well in order to dispel a previously poor reputation.
What is Bridging Finance?
Bridging finance is a short-term route to facilitating property purchases or sales, which can be a first or second charge, or a combination, secured against either residential or commercial property. It is a tool to enable property transactions to go ahead where traditional funding methods will take too long. In fact, funding can normally be turned around in seven to ten working days, meaning the borrowers can secure the property they need, without long delays.
In today’s increasingly fast paced society many individuals need to borrow large amounts of money quickly, but simply do not have the time to apply for funding in the traditional ways. This trend in the demand for short turnarounds has led to bridging finance becoming a real alternative, rather than a last resort.
How can it be used?
Bridging loans have been around for many decades but today estate agents are increasingly using them to solve clients’ funding requirements. An estate agent can rely on bridging finance when a vendor is selling at an agreed price subject to a quick completion, when a client does not have the deposit and requires 100% funding prior to a property selling or being rented out or even when a property is difficult to mortgage, as it is in poor condition or has multiple occupancy. In addition to this, estate agents can also use bridging finance when a property sale or purchase falls through because of a break in the chain or when a client has agreed to purchase a property at auction and needs to complete in 14-28 days.
Who is eligible?
Bridging finance can be completely tailored to suit the client’s needs and the loans can be structured as open or closed, meaning that there is either no definite end date of the loan or that there is an agreed redemption date.
Lenders look primarily at the type and quality of the security as the measure of lending criteria, rather than the usual evaluation of affordability. By not measuring the suitability of lending the traditional way, not only is the delivery of the fund quick, but also the decision of whether to lend is also made rapidly.
Although bridging finance is a perfect solution it is never meant to be a permanent funding source and one requirement is that the borrower has a credible strategy for re-financing out of their bridging loan in the short term.
How is the market now?
In the past, the way some bridging firms have operated has resulted in a poor image for the sector. However, since this became clear, many of today’s reputable lenders have improved the standards of consumer protection. Through the Financial Services Authority (FSA), there have been new regulations introduced surrounding issues such as disclosure of information to consumers, voluntary code and product features.
This shift in the market’s performance is echoed by statistics from the CML; annual lending in the sector currently totals around £2.5 billion and is growing at around 25 per cent a year. As the loans are repaid quickly, total balances are £1.2 billion, little more than about one-tenth of one per cent of total mortgage balances. Today, specialist bridging lenders currently control around 65 per cent of the market, up from around 20 per cent in 2000. The remainder of the market is made up of high street banks.
Transparency and clarity
As the reputation and understanding of the market improves, the situation for both lenders and borrowers should only continue to get better. At Bridging Finance Limited we are challenging what has historically been an unclear marketplace by offering transparency and clarity and have taken the bold step of offering one single ‘market leading’ interest rate of 1.25 per cent per month. We see this as being the future of bridging lending, and have tied this together with a fresh approach of being dedicated to solely servicing professional sector clients.
Estate agents and both home-buyers and sellers should begin to realise the benefits bridging finance can offer them. Acquiring property can often be complex and time consuming, but the speed in which funding can be received through using bridging finance is the key incentive for estate agents.
For more information, please visit www.bridgingfinance.co.uk
By Chris Baguley, Director of Bridging Finance Limited