In particular, understanding what the lenders’ fees and processes will be if your client ends up in a default position.
If the client has a change of circumstance or, for unforeseen reasons, is unable to repay the loan on time, this could be costly. However, is there a way that the exit route can be guaranteed?
A closed bridge is a type of loan not so often used in the current market. However, it can be used for a client where a guaranteed exit is available.
A typical closed-bridge scenario would be clients moving home: they have exchanged on the sale of their current property, but they need to complete on the new purchase before the sale completes.
They need a bridging loan just for a short time for the new purchase, and the exit will be from the finalised sale of the existing property. It is treated as a closed bridge as the exit is guaranteed because the sale has already exchanged contracts with a set completion date.
- B&C roundtable: BTL lender departures, hybrid products and utopian underwriters
- Preparing for default when the client is not to blame
- The benefits of permitted development rights for property investors
The benefit of using a closed bridge is that it is usually cheaper, as the bridging lender has less risk.
Most other bridging products are ‘open’, meaning there is no guaranteed exit. However, there are new products appearing in the market that do have a form of guaranteed exit.
Some lenders have a product that starts as a bridging loan with the option to repay the loan in the early months without charge as planned perhaps through sale or refinance to another lender. But if the client falls into difficulty in the seventh month, the product automatically turns into a two- or three-year product, buying the client more time to resolve any issues.
Other lenders have launched a specific bridge-to-let product. For example, Precise Mortgages offers a refurbishment buy-to-let where the application and underwriting for both the bridging loan and the buy-to-let are completed at the same time. There will be two valuations, one based on the property in its current condition and the other based on the post-work’s value of the property. Finally, there will be two offers. The first offer can be used to complete the purchase with the bridging loan. The second offer can be used to complete the term product as soon as the work is finished. Should the client wish to, they can arrange the term product on a higher LTV than the bridging loan, allowing them to capitalise on the maximum against the post-work’s value.
This gives a guaranteed exit and also a guarantee of the valuation and amount that will be released post-work.
It's great to see such a product come to the market, and I am sure more will follow as lenders look to find further ways to innovate.