If exit occurs before 12 months – if you, for example, exit the loan in month six then six months’ worth of interest is owed back. It is good for budgeting purposes as the worst-case scenario is made clear when financing a project, but when looking for a property, you have to be aware of your gross LTV. If you are looking to refinance onto a mortgage, is the new LTV achievable?
If you chose to service the loan, you can have a higher LTV, but it is expensive each month when servicing the interest. For developers, cash flow is key as they have sub-contractors to pay for.
Early repayment charges (ERCs); a typical loan term is up to 12 months, so watch out for ERCs within the first three months. Typically, the shorter the bridging loan, the shorter the ERC period (if there is one).
Solicitor – a hidden danger is an application being only as quick as the appointed solicitor. If they have little to no experience of bridging loans, it will hamper the application and completion time.
Valuations – all bridging loans need a valuation. Many clients already have one one, but a lender may not accept if the valuer is not on their panel. So, to the frustration of clients, they have to pay for another valuation that the lender will accept.
Evolution
Today, the market is crowded with short-term lenders and we are starting to see an evolution in bridging and short-term lending. So, as well as real estate, you can now get short-term finance against a unexpected VAT bill – a lot of people when they buy additional properties, forget to factor in the VAT bill – short-term lenders will lend against it as it is underwritten by the government and you know it will be reimbursed.
Finance can be secured against any liquid assets – for example, cars, jewellery, art and pensions. So if you are a high net-worth client with temporary cash problems, there is a wider market to discreetly raise money against other liquid assets rather than just your house or property.
Not only have we seen a change in what you can lend against, but also a change in how lenders are working, with the emergence of term loans. A ‘term loan’ is a concept commonly used by professionals within the lending industry to refer to a loan which is longer (and cheaper) than a bridging loan but typically shorter than a residential mortgage loan.
