Nadz Thobhani

Nadz Thobhani

Growth Anticipated in Bridging Finance Market, Says BDLA & Interpath

According to a survey published by Interpath and the Bridging & Development Lenders Association (BDLA) UK, brokers and lenders in the bridging finance sector expect market expansion but warn of increased loan completion delays.

A significant 62% of participants predict that yearly origination volumes will increase, with 92% believing that institutional funding will remain stable or increase over the next year.

There is also an agreement that average monthly loan interest rates would fall, with 62% of respondents citing this as a key market driver.

However, there is some concern, since 51% of respondents indicate that the average time to finalise a loan is increasing, owing to a slow legal process that causes delays.

The study also shows a negative prognosis for property recoveries, with 92% expecting foreclosure levels to remain the same or increase.

Furthermore, 51% of respondents reported that the average monthly interest rate for loans in the previous year was within 1.00% and 1.25%, and 8% reported rates greater than 1.25%.

The most prevalent loan-to-value (LTV) ratio ranged from 65% to 70%, followed by 60% to 65%. The typical size of a loan has climbed from £300k–£400k to more than £600k.

57% of respondents chose nine to twelve months as the usual loan period, indicating the market’s short-term nature.

Refurbishment was the most common reason for receiving a bridging loan, with downsizing coming in last.

The survey respondents indicated the most significant problems for their firm during the next 12 months. An increase in competition was the main obstacle, as reported by 60% of the respondents. This was followed by a reduction in property sales volumes and time to sell, with falling property values coming in third.

Nick Parkhouse, managing director and head of financial services deal advisory at Interpath, states:

Nick Parkhouse Quote

Can Bridging Help to Resolve an Election-Induced Impasse?

As the general election approaches, we want to show you how short-term finance can give landlords more flexibility than standard BTL mortgages.

Although it’s a stretch to say the nation is experiencing ‘election fever,’ it’s undeniably the headline story currently, and not just on the political front.

The announcement of a general election has a clear impact on the mortgage market. Some potential buyers will undoubtedly pause their plans, preferring to wait and see the outcome and how it might affect their purchasing decisions.

Pricing is influenced as well. The Bank of England is highly unlikely to lower rates during an election campaign, regardless of the conditions, due to potential political ramifications.

This scenario poses challenges for landlords and property investors. Those dealing with buy-to-let mortgages have noticed a significant increase in costs when refinancing their existing loans.

Adopting a flexible strategy

Recently, many investors have chosen to utilise flexible short-term financing as an alternative approach.

The interest rates for bridging loans are comparable to those of traditional buy-to-let (BTL) mortgages, but they offer significantly more flexibility.

For instance, an investor might be planning to reorganise their portfolio by selling properties that aren’t generating satisfactory yields. According to the National Residential Landlords Association, approximately one-third of investors are considering reducing their portfolios, even though tenant demand remains strong.

Selling properties under a standard BTL mortgage can result in substantial exit fees, diminishing the profits from the sale.

However, if investors use bridging loans instead, they can sell their properties whenever they choose without incurring any exit fees.

Leveraging flexibility in financing

Investors greatly benefit from the flexibility that short-term financing provides when transitioning to long-term financing options. Whether the Bank of England reduces the base rate in the near future or further down the line, investors using bridging finance can seamlessly switch to more competitive BTL products when it’s financially advantageous, without the burden of exit fees.

Contrast this with the scenario where a landlord commits to a long-term BTL mortgage now, only to face significant refinancing costs 12–18 months later if rates drop and the advantages of bridging loans become clear.

The need for lender flexibility

This strategy is appealing to many refinancing investors, offering them enhanced control and flexibility. However, this flexibility must also be reflected by the lenders. Predicting rate changes is challenging, and while it appears likely that the base rate will decrease sometime in 2024—possibly by late summer—recent history has shown that such predictions can be unreliable.

An investor might plan to refinance into a BTL deal within a year, but unforeseen circumstances might necessitate a longer holding period. Many lenders limit their terms to 18 months, which can be restrictive. Feedback from brokers and clients indicates that the 24-month term offered by Tuscan is particularly appreciated. While most investors do not anticipate needing the loan for that long, they value the extended period as a cushion to wait for more favourable rates.

Investors prefer not to face the hassle of obtaining another bridging loan if BTL rates haven’t decreased as expected after a year.

Choosing knowledgeable lenders

This underscores the importance of working with lenders who truly understand the market and the needs of landlords. This expertise doesn’t happen by accident; it stems from extensive experience in the sector and close collaboration with brokers and their clients, leading to a deeper understanding of the most effective products and processes.

As 2024 progresses, bridging finance is likely to become even more attractive as a means to wait out high BTL rates. Brokers should focus on identifying lenders that offer the long-term flexibility their clients need.

Flexible and Affordable Bridging Loans: An Ideal Refinancing Solution for Buy-to-Let Landlords

Landlords thinking about refinancing right now face a challenging scenario, as current interest rates on buy-to-let (BTL) products are not particularly attractive to many property investors.

Despite Moneyfacts data indicating that average BTL rates have decreased compared to the beginning of the year and the same time last year, they are still significantly higher than the historically low rates seen in recent years.

The prospect of locking in these rates becomes even less appealing when considering the potential for rates to drop in the coming months. In our opinion, this situation underscores the importance of brokers placing greater emphasis on bridging loans and short-term finance options.

What the future may hold

While predicting mortgage rates with certainty is impossible, the outlook for buy-to-let (BTL) products becoming more competitively priced is promising. Inflation is gradually decreasing, albeit slower than desired, but it is moving in the right direction. Consequently, there is an expectation for a base rate cut in the near future, likely not in June during the general election campaign but possibly in August or September.

As we approach this potential shift, swap rates are anticipated to decline, which should lead to more attractive long-term pricing for landlords and investors. The main challenge is determining the best course of action in the interim.

Bridging loans offer competitive pricing and flexibility compared to traditional BTL

Bridging loans have long been valued by investors needing to act swiftly on purchases, but they are especially advantageous in today’s market conditions.

Currently, the pricing of bridging loans is comparable to traditional buy-to-let (BTL) deals, yet they provide significantly more flexibility. Landlords are not locked into long-term agreements or pressured to adjust rents to meet Interest Coverage Ratio (ICR) tests. Instead, they can utilise a bridging loan for up to a year, with the option to refinance into standard BTL products when more favourable rates are available.

Moreover, this approach allows landlords to restructure their portfolios without incurring additional charges. They can sell underperforming assets while on a bridging loan without facing exit fees, a common issue with regular BTL products.

Recently, many investors have been leveraging bridging loans in this manner. This trend underscores the necessity for brokers to have a comprehensive array of financing options available for their investor clients, ensuring they can support any planned endeavours with suitable financial solutions.

Additionally, bridging lenders should consistently emphasise the versatility of these products, helping brokers fully understand how they can best meet their clients’ needs.

Bridging Loan Activity Remains Robust Amidst Growing Demand for Business Financing

Recent findings from Bridging Trends indicate that contributor gross bridging lending hit £196.2 million in the first quarter of 2024, underscoring the increasing appetite for additional business funding among entrepreneurs.

Quarter 1 2024 key points:

  • Gross Contributor Lending: A 0.4% increase
  • Business Financing Demand: Doubled from previous periods
  • Second Charge Bridging Loans: Achieved a three-year peak
  • Regulated Bridging Deals: Rose to pandemic-era levels

The reported bridging loan transactions for quarter 1 2024 held steady at £196.2 million, a continuation of the momentum seen in quarter 4 2023’s £195.5 million.

Trends in bridging finance utilisation: Quarter 1 2024 Overview

During quarter 1 2024, the primary use of bridging finance was for acquiring investment properties, representing 21% of the total loans, slightly down from 24% in quarter 4 2023. Notably, business funding demand saw a significant rise, almost doubling from 8% in quarter 4 2023 to 15% in quarter 1 2024, its highest point since quarter 4 2021. This surge is likely a result of business owners pursuing stability and growth opportunities.

Preventing chain breaks was the second most common reason for securing bridging finance in quarter 1, with its share increasing to 19% from 16% in the prior quarter.

Increasing bridging loan demand due to home purchase delays

With prolonged home purchase processes and the risk of chain breaks, more homeowners are opting for bridging loans to secure their desired properties. This led to regulated bridging loans comprising 51% of all bridging loans in quarter 1 2024, up from 44.2% in Quarter 4 2023, the highest since Quarter 3 2020’s 53%.

Data from Knowledge Bank shows that regulated bridging was the top search criterion for UK bridging loan brokers in quarter 1. This increased preference for regulated bridging likely contributed to the decrease in the average monthly interest rate from 0.91% in quarter 4 2023 to 0.89% in quarter 1 2024.

There was also a notable rise in borrowers using bridging finance to leverage equity in their assets. The demand for second charge bridging climbed to a three-year high of 21.3% in quarter 1, up from 11.6% in quarter 4 2023 and nearing quarter 1 2021’s 22.2%.

The average loan-to-value (LTV) ratio edged up to 60% in quarter 1, from 59.3% in quarter 4 2023. The average time to complete a bridging loan remained at 58 days, and the average loan term has been steady at 12 months for ten consecutive quarters.

For more details, check out the Bridging Trends from quarter 1 in 2024 infographic at www.bridgingtrends.com.

70% of Brokers Anticipate Surge in Bridging Business 2024

The latest Castle Trust Bank Pulse survey reveals that over two-thirds (68%) of brokers are gearing up to orchestrate a higher volume of bridging loans in 2024 compared to the preceding year. Among them, a notable 25% anticipate a substantial upswing in business, while 43% foresee a more modest yet promising increase.

While one in five (21%) brokers anticipates demand to hold steady, a mere 11% expresses apprehension about the possibility of bridging business levels during a downturn.

This optimistic perspective mirrors the ongoing expansion in the demand for bridging finance. The research highlights that 42% of brokers facilitated more bridging loans in 2023 compared to the previous year. Interestingly, this contrasts with the 38% of brokers who reported arranging fewer bridging loans for first-time investors over the same period. This suggests that seasoned property investors are at the forefront of propelling the escalating demand for bridging loans.

In response to the burgeoning demand for bridging services, brokers ramped up their recruitment efforts. Impressively, the survey reveals that 42% of respondents expanded their teams in 2023 to meet this growing need.

However, amidst this growth, brokers remain vigilant about potential challenges. According to respondents, the foremost concerns regarding the sustained expansion of the bridging market include persistently high bridging loan interest rates and political uncertainty. Following closely are apprehensions regarding property prices and the trajectory of the economy, underscoring the importance of navigating these factors for continued success in the sector.

The insights stem from the most recent Pulse survey conducted by Castle Trust Bank, designed to monitor shifts in sentiment and practices within the bridging landscape while capturing broker viewpoints on pertinent matters.

An array of specialist finance brokers spanning the industry participated in the survey, contributing to its comprehensive scope. Furthermore, the findings incorporate feedback from Castle Trust Bank’s esteemed panel of Pulse Partners, comprising prominent names such as Brightstar, CFP Group, Charleston Financial, Complete FS, Coreco, Karis, Propp, and Vibe Finance.

Understanding Loan-to-Value (LTV) Ratios in Bridging Finance: Maximising Borrowing Potential

Understanding loan-to-value (LTV) ratios may unleash your borrowing potential in the complex world of bridging financing, where speed and flexibility are critical. Whether you’re a seasoned property investor or a first-time borrower, understanding the subtleties of LTV ratios may help you make educated financial decisions and acquire the finance you need to capitalise on profitable prospects.

What is the loan-to-value (LTV) ratio?

At its core, the loan-to-value (LTV) ratio is a fundamental metric used by lenders to assess the risk associated with a loan relative to the appraised value of the property. It represents the percentage of the property’s value that the lender is willing to finance. For example, if a property is valued at £500,000 and the lender offers a loan of £400,000, the LTV ratio would be 80% (£400,000 divided by £500,000).

Importance of LTV Ratios in Bridging Finance

In the realm of bridging finance, where transactions often occur swiftly and timelines are tight, LTV ratios play a crucial role in determining the terms of the loan. Unlike traditional mortgages, bridging loans are typically short-term solutions used to bridge the gap between the purchase of a new property and the sale of an existing one or to facilitate property development projects. Therefore, understanding and optimising LTV ratios can be instrumental in maximising borrowing potential and minimising risk.

Maximising Borrowing Potential with LTV Ratios

  1. Property Valuation Accuracy: Obtaining an accurate appraisal of the property is essential in determining its market value. Working with qualified surveyors or appraisers who have a deep understanding of the local property market can help ensure that the valuation reflects the true worth of the property.
  2. Leveraging Equity: For borrowers with existing properties, leveraging equity can significantly impact the LTV ratio. By using the equity in one property as collateral for a bridging loan, borrowers can access higher loan amounts, thus increasing their borrowing potential.
  3. Mitigating Risk: Lenders assess LTV ratios to evaluate the level of risk associated with a loan. Lower LTV ratios generally indicate less risk for lenders, potentially leading to more favourable loan terms, including lower interest rates and fees. Therefore, borrowers should aim to keep LTV ratios within manageable limits to enhance their borrowing potential and mitigate risk.
  4. Financial Stability and Creditworthiness: Lenders also consider the financial stability and creditworthiness of borrowers when determining loan eligibility and LTV ratios. Demonstrating a strong financial standing, a reliable repayment history, and a solid credit score can improve your chances of securing higher loan amounts at favourable LTV ratios.

Conclusion

In the dynamic landscape of bridging finance, understanding loan-to-value (LTV) ratios is paramount for maximising borrowing potential and securing the funding needed to capitalise on lucrative opportunities. By leveraging accurate property valuations and equity and demonstrating financial stability, borrowers can optimise LTV ratios, thereby accessing higher loan amounts at favourable terms. Ultimately, by mastering the nuances of LTV ratios, borrowers can navigate the world of bridging finance with confidence and achieve their property investment goals.

How Does a Closed Bridging Loan Work?

How Does a Closed Bridging Loan Work?

In the fast-paced world of property transactions, unforeseen circumstances can arise, requiring quick and flexible financial solutions. This is where closed bridging loans come into play. They act as a temporary bridge, providing the necessary funds to “bridge the gap” between buying a new property and selling your existing one. But how exactly do closed bridging loans work? Let’s delve into the details:

1. Fixed repayment date:

Unlike open bridging loans, which offer more repayment flexibility, closed bridging loans have a predetermined repayment date. This date is typically aligned with the expected completion date of your property sale, ensuring the loan is fully repaid before it becomes due.

2. Defined loan amount and interest:

Based on your specific needs and the property value, the lender will determine a fixed loan amount along with the interest rate. This provides transparency and allows you to plan your finances effectively.

3. Security against an asset:

Closed bridging loans are typically secured against an asset, most commonly the property you are buying. This means if you fail to repay the loan, the lender has the right to repossess the property to recoup their funds.

4. Application process:

The application process for a bridging loan typically involves:

· Submitting a formal application:

This includes detailed information about your financial situation, the properties involved, and your exit strategy (plan to repay the loan).

· Providing supporting documents:

Documents such as property valuations, proof of income, and sale agreements for your existing property may be required.

· Undergoing credit checks:

The lender will assess your creditworthiness to determine your eligibility and suitability for the loan.

5. Exit strategy is key:

A crucial aspect of securing a closed bridging loan is demonstrating a clear and realistic exit strategy. This involves convincing the lender that you have a concrete plan to repay the loan by the predetermined date. This plan could involve:

· Confirmed sale of your existing property:

Having a buyer lined up with a confirmed sale agreement strengthens your application.

· Alternative funding secured:

If the sale of your existing property takes longer than expected, having alternative funding options in place, such as remortgaging your current property, can improve your chances of approval.

6. Advantages of closed bridging loans:

· Faster access to funds:

Compared to traditional mortgages, closed bridging loans can provide quicker access to funding, which is crucial for securing a new property before it goes off the market.

· Potentially lower interest rates:

As the repayment date is fixed and the loan is secured against an asset, closed bridging loans may offer competitive interest rates compared to open bridging loans.

· Structured repayment plan:

Knowing the exact repayment date and total amount allows for better financial planning and budgeting.

7. Disadvantages of closed bridging loans:

· Less flexibility:

Compared to open bridging loans, closed bridging loans offer less flexibility in terms of repayment dates.

· Potential pressure to sell:

If unforeseen circumstances delay the sale of your existing property, you may face pressure to sell quickly to repay the loan by the fixed deadline.

· The exit strategy is critical:

The inability to demonstrate a credible exit strategy can significantly hinder your chances of securing a closed bridging loan.

 

In conclusion, closed bridging loans can be a valuable tool in property transactions, especially when speed and certainty are crucial. However, carefully considering the fixed repayment date, potential risks, and suitability for your specific circumstances is essential before making a decision.

It’s important to remember that consulting with a financial advisor and comparing offerings from different lenders before committing to a closed bridging loan is vital.

Do I Need a Solicitor for a Bridging Loan?

Bridging loans offer a short-term financing solution for individuals and businesses in various situations, from property purchases to funding urgent financial needs. However, navigating the complexities of securing a bridging loan can often raise questions about the necessity of legal representation. In this post, we explore whether you need a solicitor when considering a bridging loan and the role they play in the process.

Understanding bridging loans

Before delving into the necessity of solicitors, let’s briefly understand what bridging loans entail. Bridging loans are temporary financing options typically used to bridge the gap between the purchase of a new property and the sale of an existing one. They are also utilised for property development, renovations, or to meet short-term cash flow needs.

The need for legal representation

While it’s not a legal requirement to involve a solicitor when obtaining a bridging loan, their expertise can be invaluable throughout the process. Here’s why:

  • Contractual Review: A solicitor can review the terms and conditions of the loan agreement to ensure they are fair and in your best interest. They can also identify any clauses that may be disadvantageous or unclear.
  • Legal Advice: Solicitors provide legal advice tailored to your specific circumstances. They can help you understand the legal implications of the loan agreement, including your rights and obligations as a borrower.
  • Property Due Diligence: If the bridging loan involves property transactions, solicitors can conduct thorough due diligence to identify any legal issues or potential pitfalls associated with the property.
  • Documentation: Solicitors can assist in the preparation and execution of legal documents required for the loan, including mortgage deeds, security documents, and loan agreements.
  • Protection of Interests: Having a solicitor represent you ensures that your interests are protected throughout the loan process. They can negotiate terms with the lender on your behalf and address any concerns or disputes that may arise.

Considerations for Self-Representation

While involving a solicitor can offer peace of mind and legal protection, some borrowers may choose to handle the loan process independently. However, it’s essential to consider the following:

  1. Legal Complexity: Bridging loan agreements can be complex, especially for individuals without legal expertise. Self-representation may lead to misunderstandings or overlooking crucial details in the loan documentation.
  2. Risk Mitigation: Without legal representation, borrowers may be exposed to risks that could have been mitigated with professional advice. Legal errors or oversights in the loan agreement could have long-term consequences.
  3. Cost-Benefit Analysis: While solicitors’ fees add to the overall cost of obtaining a bridging loan, the benefits of legal representation, including risk mitigation and peace of mind, often outweigh the expenses.

While it’s not mandatory to involve a solicitor when obtaining a bridging loan, their expertise can provide valuable assistance and legal protection throughout the process. Whether you choose to enlist legal representation or opt for self-representation, it’s crucial to fully understand the terms and implications of the loan agreement. Ultimately, the decision to involve a solicitor depends on your comfort level with legal matters, the complexity of the loan transaction, and your willingness to invest in professional assistance for peace of mind and protection of your interests.