Bridging Finance is a neat little tool used to purchase properties that are unmortgageable via long term mortgage loans, very quickly. Bridging loans can provide funds to purchase and develop, or even refurbish properties, ready for an exit. But, and there is a but, care is needed in terms of the intended exit strategy. Bridging finance is only designed to be a short term finance solution, and, like fire, can be a great friend, but a terrible enemy!
“The very nature of short term funding often means that loans are arranged and secured within a very short time frame and as such the exit strategy is not always given a full reality check by the borrower,” said Mark Lanario, for Enhanced Wealth Ltd
Bridging Finance exit strategies involve a re-finance, sale, or another source of capital, such as the sale of another property, sale of a business, or an inheritance.
“When bridging finance goes bad, it’s generally exit strategy related”, said Mark.
When the exit strategy is re financing onto a long term loan, this needs some real forward thinking and research. There is much that could go wrong, at any stage, and it’s not as straightforward as it first appears. Most lenders in the buy to let mortgage market will not re-mortgage from bridging finance for reasons that remain unclear. “It’s a real problem”, said Mark “The vast majority of buy to let lenders won’t provide a refinance from a bridge; however, options do exist”.
One very clever way to avoid being stuck on the penalty interest of an overstay on short term funding, is to opt for a guaranteed pre agreed exit that can be provided by a lender that offers both bridging finance and long term buy to let loans. On paper, this route may appear to be a little more expensive, but the savvy investors seem to be enjoying the idea enough.
“Pre agreed guaranteed exits with the same lender that provided the bridging finance provide a degree of certainly in an uncertain world, in terms of profit”, said Mark, “Where your intended bridging finance exit is re finance, term mortgage lenders are often quite slow and it’s very easy to be stuck on a bridge facility for two or three months after a project is complete, which can be very costly”.
Using the bridging loan funder to provide the long term finance solution makes good sense in terms of knowing how much profit can be locked into the deal, because all of the costs are known upfront. On the bridge side, the valuer is instructed at outset to determine the day one value, comment on the realism of the development costs, plus supply a projected end value. In addition, the valuers remit will include a buy to let appraisal, which will include a rental assessment based on the completed project. On completion the valuer will revisit the property development to ensure that it has been completed properly. If he confirms that it has, the bridge is converted to a term loan. All under one roof and seamless, which can be very appealing, particularly to small scale developers.