What are your clients’ options when a sale falls through? More and more house buyers are turning to bridging loans to rescue a sale, helping drive this sector of the market upwards.
Figures from the Association of Short Term Lenders show that bridging loan completions passed £1.4 billion in Q1 of 2023, an increase of 11.8% on the previous quarter[1].
Sales fall through for many reasons; a bad survey, failure to secure a mortgage, delays in conveyancing, or sometimes a simple change of mind from one of the parties involved.
Chain breaks proved to be the main reason for taking up a bridging loan in Q1 of this year. 25% were used for this purpose, up 10% on the previous quarter. This is ahead of investment purchase (15%), re-bridge finance (10%), business purposes (9%), and auction purchase (5%)[2].
The total gross lending for such finance was up from £166.3m in Q4 of 2022 to £278.8m in Q1 2023, an increase of 68%.
Why a bridging loan?
Is your client looking for a short-term loan solution? Maybe their purchase has hit one of the problems we’ve talked about. There are several reasons why a bridging loan could be just what they’re looking for. They could be trying to:
- Raise capital quickly
- Complete a purchase before their property has sold
- Prevent repossession
- Raise funds for a major refurbishment
- Complete below-market-value purchase
- Buy a property at auction
A bridging loan may be a perfect fit for your client because:
- They can be arranged quickly. And it’s getting quicker! The average completion time has dropped by 12 days in the last quarter to 54 days[3].
- There are various repayment options to suit a client’s needs. They can repay in monthly instalments as with a traditional mortgage or they can ‘roll up’ the interest on the loan and repay it at the time of repaying the loan itself, avoiding monthly repayments. All subject to lender terms and conditions.
- They can be more flexible than mortgages with less strict criteria allowing for common-sense lending. Although be aware the lender will carry out their own affordability and criteria checks.
- They can prevent financial loss if used to avoid a situation where the client falls into adverse credit.
Things to note
Talking to your clients about bridging loans? There are aspects you should make them aware of.
Bridging loans are a quick fix, not a permanent solution. The lender will want to know your customer is aware of this. Bridging loans do what it says on the tin, they ‘bridge the gap’ between the purchase of one property and another.
An exit strategy is essential. Borrowers without one will not be considered by lenders. So they will need to have a plan in place to move to a remortgage, pay the loan off following a property sale or convert to a buy-to-let when a refurbished property is ready for rental.
Bridging loans are fast and convenient but your customer will pay for this with higher interest rates.
Make your customer aware they could incur various fees such as a lender arrangement fee, a valuation fee, and legal fees.
Alternatives
Bridging loans might not be suitable for everyone, so what are the alternatives?
Remortgaging of the current property may prove a better option by unlocking equity to use on renovating another property. The drawback here is remortgaging can take longer, usually between six and eight weeks, however, it could be cheaper short-term. Longer-term your client could pay more over the course of repayments.
Development loans see an initial loan put forward against the value of a site or property. Additional funds are released in stages throughout the build to cover costs. Again, this is a short-term funding option, usually between six and 24 months.
A second charge mortgage may be beneficial with your customer keeping their existing mortgage rate. This could allow for more flexibility in repayment terms and a potential saving on interest.
Auction finance is a type of bridging loan designed to relieve the pressure on the buyer in having to complete the purchase within 28 days. Therefore, a good option for buyers who don’t have cash in the bank or access to other sources of funding.
Chain breaks proved to be the main reason for taking up a bridging loan in Q1 of this year. 25% were used for this purpose.
Specialist advice
With the market for bridging loans continuing to grow and competition increasing with the addition of more lenders, rates are coming down. Now is the time to explore the area for yourself and your client. But are you confident you can give the best advice in such a specialist field?
Bridging is a specialist and complex area which requires expert advice and a lot of work to make sure clients receive recommendations that suit their needs and circumstances. But don’t worry, help is at hand.
We have formed a strategic partnership with Propp, the UK’s first comparison site for specialist property finance meaning you can refer a client to them and generate an income for your business too, earning a percentage of the proc fee on all completed cases.
Not only that, Propp lives and breathes specialist finance, so you can rest assured your clients are in good hands. Propp keep you updated throughout and you keep control of your client.
Don’t miss out, find out more. Start referring clients and earning here.
