Karen Bennett, Sales and Marketing Director, Commercial Mortgages, Shawbrook Bank, asks:
When is a bridge not a bridge? When it’s a short term loan…
astl
Recent data from The Association of Short Term Lenders (astl) revealed that for the first quarter of 2013 the combined short term lending figure of its members was over £1 billion. Evidently short term finance is increasingly in demand in the property investment market. This can be attributed both to a rise in the number of houses sold at auction that are in need of renovation, and to a continued reluctance on the part of mainstream banks to lend.
Bridging
More and more property investor clients are turning to short term finance, like bridging loans, to (as the name suggests) bridge that gap. But what exactly are bridging loans? How can they help? How do they differ from short term loans (STLs)? And are they always the best option for your client?
In the face of regulator concern about the occasional misapplication of bridging finance, being sure of the answers to these questions has never been more important for brokers. And with lenders like Shawbrook Bank boosting the short term finance market and helping drive down the prices on STLs specifically, brokers who understand these product distinctions can be part of some great deals.
Bridging snobs
STL providers have been viewed on occasion as ‘bridging snobs’ – but we feel there are both key similarities and distinctions between STLs and traditional bridges.
STLs
Both can be impressively speedy, but STL lenders are more stringent as to what the loans can be used for. Bridges are used for a variety of purposes – to deal with chain breaks, to release equity quickly for short term issues, or to purchase properties with known issues such as title or planning concerns which the client intends to remedy before moving the property on.
Bridging loans also typically last for less than twelve months, but until the introduction of more stringent regulation in 2014, the specifics of what defines a bridge have been somewhat hazy.
Price and Exit
One of the things that does appear to typify a bridging loan, is its price. Bridging loans have habitually carried the stigma of being an expensive option, and something which would be used as a last resort when other options have dried up. As the property market picks up, this attitude to short term finance in general is changing. Bridging loans, however, are still generally open ended. A looser and therefore speedy approach to valuation and exit plans is the investor client’s return for the high price funds. And, as such, they might initially seem an attractive option to brokers and lenders. But with their sometimes riskier exit strategies, bridging loans can be left more open to unanticipated issues occurring at a later date. As such they are not necessarily in the broker, or the client’s best interests.
Shawbrook
Thankfully for us, the market is seeing a growing interest in STLs, which can be seen to offer a more viable and responsible alternative to bridges. And this is where specialist lenders like Shawbrook come in. As a regulated bank, due diligence, TCF (Treating Customers Fairly) and complete transparency are essential. Our STL offering includes thorough legal due diligence, which is not always the case with a number of bridging loans. We also take the time to ensure the client is experienced and in a strong financial position. We adopt a thoroughly personal and flexible approach to our short term finance cases, and we rely on our fantastic network of brokers to complete the picture for us. Being thorough ensures the client doesn’t get any nasty surprises post completion, which helps us drive down prices. Our stance and pricing confirm our commitment to becoming a key player in the STL market.
Commissions
We have demonstrated our appetite to lend in this sector by increasing the standard commission paid on our STL products to 1.5 per cent on all loans up to £2.5 million at the start of 2013 – recognising the essential role the brokers play in these time sensitive cases. Responding to feedback, we’ve also removed the minimum term requirement on all short term products. Our market leading rates are 0.65 per cent per month for standard short term and just 0.73 per cent per month for refurbishment. We are upfront and transparent when it comes to these rates – we will never use gimmicks to lure brokers and their clients in.
Demand
Demand is high, and Shawbrook offers a range of STL products to suit the requirements of the market – whether your client is purchasing a buy-to-let property at auction with a view to improving it for rental, or needs to release capital for renovation before their property is resold. What’s more, whereas many bridging loan providers work exclusively on these deals, the breadth of options at Shawbrook means we can help accommodate clients’ exit strategy and changing circumstances by allowing them to switch to a term loan of 3 or even 5 years.
Broker partners
However, we don’t believe we are perfect. That’s why we have been working closely with our broker partners to examine every element of our STL processes, and are consequently hoping to launch some exciting changes very soon.
Bridging vs. STLs
Unlike bridging loans, then, sourcing STLs from banks like Shawbrook mean you can expect better pricing, no nasty surprises for your client post-completion, and more options. That being said, while varying in their offering and criteria, both bridging and short term loans have definitely helped give the property market much needed liquidity, as specialist lenders continue to bridge the gap left by the high street banks.
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