I am not suggesting for one moment that applicants with a less than perfect credit rating or payment profile should not be able to take out bridging finance. There are some instances where bridging can be a genuine ‘life-saver’ for clients – including stopping repossession of a property and keeping clients in their home.

I am just stressing the importance of the broker’s role to ensure that they can get their clients out of the bridge, which is just as important, if not even more important than putting them in to it in the first instance.

Short-term funding is versatile and serves many purposes, which has been covered numerous times in the industry press; from auction funding, to chain-breaks, property renovations and so on.

That said, I thought it might be a good idea to look at bridging from a different angle and switch the focus to what bridging shouldn’t be used for, (although continued education of intermediaries and the general public is still very much an ongoing process).

Bridging should not been seen as finance that is taken when a mortgage is not available to the borrower – an example would be where the client has applied for a mortgage on a property and was declined for failing credit score, perhaps due to poor payment profile.

In this instance, to put the client in to a bridging loan, where the term is likely to be limited to 6 to 12 months maximum, would not be a responsible recommendation. Not unless there is a guaranteed mortgage refinance at the end of the bridging term – something that is very difficult to ascertain 6 to 12 months in advance.

 The broker’s responsibility doesn’t end when the bridging finance has drawn-down and the bridging loan completes. That is 50% of the job that the broker must do. The other 50% of the job is to get the client refinanced out of the bridging loan on or before the end of the term.

Failing to repay a bridging loan by the end of the term will at very least cost the client an additional arrangement fee to extend the loan, but it could automatically lead to default interest rates being charged (I have seen these as high as 5% per month) and in the worst case scenario, the lender would seek to repossess the property through default.

So what if exit is not refinance and is therefore sale? Surely then bridging is the answer? Well... no! Not always.

The broker that suggests a 3 month bridging loan for his clients who are intending to exit via sale is not realistic at all.

 I spoke to a broker just today who was looking to refinance an existing bridging loan that had already been refinanced previously by 2 other bridging lenders.

When a client has failed to repay their 3rd consecutive bridging loan, each one taking out the former, then someone has to stop and ask why the first and second bridging loans were not repaid on time? In this instance, the clients intended to sell the property, which it turns out was massively over-priced and had sat on the market for 2 years without so much as a sniff of an offer.

The clients had taken bad advice from an estate agent on how much they considered their home was worth and had been holding out for a sale, all the time seemingly oblivious to the fact that they were paying bridging rates of 1.25% per month on a mounting bridging debt, secured against their primary residence.

 The client’s ages and income did not permit an exit via remortgage and hence sale was the only viable exit strategy. If the clients had just dropped the asking price of the house, then it would have probably led to a sale and cost them far less than letting the bridging roll-up for 2 years, and now looking to bridge for a 3rd time.

I cannot stress enough that bridging loans and short-term property finance are invaluable tools and do hold many of the answers to funding solutions.

 Bridging has been the ‘knight in shining armour’ when High Street banks have not had the funds or appetite to lend, to not just individuals, but also SMEs. Bridging has undoubtably helped to aid the recovery of the recession and dark days following the credit crunch of 2008.

All I am saying is “be careful”. Consult an expert. Take advice and have a viable exit route in place.
 

By Kit Thompson, Head of Bridging & Commercial, Brightstar Financial