Why use Short Term Finance / Bridging Loans?

Short term finance (Bridging) was initially used as a way to mend a broken link in a housing chain and typically used to ‘bridge’ the gap between a house sale and completion.

However, bridging is often also used for people buying at auction, to meet strict deadlines - usually of 28 days - for people wanting to carry out refurbishments to boost the value of their homes or for numerous business purposes. Some lenders will also help with short term VAT requirements subject to strict controls.

In more recent years, the market has seen a broader number of uses for short-term loans as their popularity has increased. For example, many commercial premises are now being converted into residential houses or flats, because of the expansion of permitted development rights, and bridging loans can be used in the initial stages of the conversion with longer term funding provided once the building project has started.  Short-term finance can be used to buy new equipment, to build up stocks ahead of an expected rush on seasonal orders, or for buying shares in another business.  It’s becoming increasingly popular, mainly because of its speed and flexibility.

For example, a couple may own a £300,000 house with an outstanding mortgage of £150,000. They may have seen their dream home for £500,000 but the vendor will only sell on condition that they exchange contracts within three weeks and complete in four.  It may be difficult to get the finance from a bank or building society to buy the house in such a tight time frame, so they can take out a short-term loan, which is regulated by the Financial Conduct Authority (FCA) as a stop-gap.  Short-term loans are typically for 12 months and the borrower pays monthly interest, which can be “rolled up” and deferred until the loan ends. However, the loan can usually be paid off before the loan ends. In this case, it could be when the couple sell their previous house.  

Alternatively it might be used for a commercial property acquisition.  An investor may want to buy additional units on a business park. However, the seller will cut the price of the sale if the investor can pay within three weeks. His bank may be unable to provide the money needed in such a short timescale, so he will be able to take out a bridging loan to cover the purchase cost, secured against the other units already owned on the business park. Lenders could provide the loan ahead of the deadline, giving the investor time for his bank to release the funds to pay back the loan.

Whatever the scenario, short term finance can be used for a wide variety of opportunities and as always, seek professional advice.

Self Build, refurbishment or development? There are plenty of options..

As the local area continues to become a virtual ‘new homes exhibition’, there are a number of lenders also assisting customers with more private projects such as development, self-build, or if you just want to upgrade your existing property by way of refurbishment. 

On a self-build, the customer normally buys the land and the lender will issue the funds to build, on a stage basis. Normally once the foundations have been laid, property built to eaves level, made watertight and so on.  At each stage a valuer will review and advise the lender of progress and to enable the release of payments.  You will tend to find the lender will lend on the Gross Development Value (the end value).

On a full refurbishment, again, the lender will want to know the plans and may lend in stage payments against the end value of the property, depending on the extent of the works involved. They will almost always require a schedule of works – extension plans, kitchen, bathroom, etc. 

The lender will require sight of all planning permissions and estimates of costs involved before lending any funds.  Seek out a local architect to assist you with plans and costs and always make sure you set out accurate budgets from the outset.

Lenders will cater for all types of scenarios (dependant on the exact type of works required!).  Each lender will work on the valuers comments once they have visited the property and adjust their offerings accordingly.  Just because the high street or your current lender says no, does not mean that it can't be done! 

Have you heard of the Tipton Building Society?  What about the Saffron, Harpenden, Principality, Dudley, Furness, Shepshed, or the Stafford Railway Building Societies?  Not necessarily household names, but we are seeing these names and a lot more like them launching innovative products.  Not always looking for huge volumes but looking to fill gaps in the market and this should be applauded.  

A good broker will, in most cases, have a relationship with these types of lenders, understand their requirements and ensure all the correct information is submitted from day one.  There really is no better time to utilise the expertise and staffing levels they can provide for you in what’s becoming an over informed and more recently, highly competitive market place.

Remortgage to renovate rather than move? Or Buy to Let?

There have been a number of remortgage applications recently for those looking to raise funds to purchase other properties or to make improvements to their current homes.  Just around the local area, I have seen an amazing amount of building work and renovations / extensions being carried out.  Many home owners appear to be improving their current residence rather than taking the big leap of selling and moving up (or down) the ladder.  This appears consistent with the general view that there is a shortage of properties up for sale.

Other consumers might be making the next step, but are then renting out their current property on a Buy to Let basis rather than selling it.  Nice if you are in that lucky position!  The rental market is certainly buoyant and showing no signs of slowing down over the coming months. So a Buy to Let might provide you with a modest return for your investment and may be the start of building a little portfolio nest egg for later on life. We have noticed that this is a growing desire for many who fear that their pension arrangements may not be sufficient and that rental income may be a suitable supplement.  Many new lenders have also launched in to this sector over recent months.

Over the last week we’ve seen rate increases in the fixed rates arena as column inches increase in speculation over a bank base rate rise in November.  However, lenders are still competing for business even as we move in to the final stages of the year.  We’ve seen reductions in the Buy to Let sector and the specialist bridging/short term lending market has seen movements in both criteria and rate decreases.  There are many opportunities whatever your circumstances and lenders are willing to have a conversation in order to do the right deal.

Finally, AToM was thrilled to receive a National Mortgage Adviser Award for the Best Use of Technology last month.  Many thanks to everyone who voted for us, it really is appreciated!