Bridging loans and medium term finance options
The amount of money being lent out through bridging finance is most likely going to increase further throughout 2012. This in many ways is good news for future customers who will be taking out a bridging loan. This expected increase continues the rise in bridging finance that has taken place over the last two years, very much the exception to finance in general, the supply of which has decreased since the credit crunch.
Like other forms of finance the requirements for obtaining bridging finance has become more stringent since the credit crunch, however bridging criteria is nevertheless much more flexible than other methods of borrowing. Many bridging loan facilities allow for a poor credit history and are also flexible in affordability because bridging loans are only for the short term. The type of security used to secure bridging loans can also be more diverse, in that certain property unacceptable to the more mainstream lenders maybe perfectly acceptable to a bridging finance provider. For example property that is in need of rebuild or of an unusual construction.
The toughening lending criteria that has made it difficult or impossible for many customers to obtain finance from the mainstream lenders is one reason why bridging loans have become more popular. Being unable to find finance from their normal sources, customers have looked elsewhere, leading some of them to opt for bridging finance.
The rise in demand for bridging loans and potential profits has encouraged more bridging providers to enter this market, and existing providers to expand their lending. With more bridging providers offering more bridging finance this is great news for customers. Increased competition will lead to better deals for customers, along with improved service and more options with regards to lending criteria and terms and conditions.
For people looking for a short term loan having the bridging finance providers has proved to be a very welcomed alternative to the mainstream lenders. However, for people looking for long term finance there isn’t really any great long term borrowing options that have more flexible lending criteria. As for medium term finance some of the bridging providers are starting to offer medium term facilities of up to 3 years. Although their underwriting is not as flexible as it is for their bridging loans, in particular they are concerned about affordability and how the loan is going to be repaid along with any monthly interest payments, they are providing serious finance alternatives.
Short term loans which are available quickly and with flexible lending criteria can be a better alternative to a bridging loan. For customers who require finance for the short term but are unsure about when their funds to repay a bridging loan will be available, due to for example waiting for their property to sell, a short term loan can provide more breathing space in addition to being a cheaper option. This is particularly important when a bridging loan is reaching the end of its term, because no one wants to be in the situation of having to accept a low offer on a property due to it turning into a distressed sale!
As UK inflation falls, so does France’s credit rating
In November 2011 the UK Consumer Price Index had inflation at 4.8%, but this fell during December 2011 to 4.2%. Similarly the Retail Prices Index, which is the UK’s inflation figures which also takes into account mortgage payments, also fell, from 5.2% in November 2011 to 4.8% in December 2011. These falls are the highest for over 2 years and signify some hope that inflation could drop to 2% by the end of 2012.
Over the channel France has had its triple A credit rating reduced a notch by Standard and Poors. Austria has also had their triple A credit rating reduced, following major economic powers like Japan and the USA who had their triple A credit ratings reduced last year.
Standard and Poors have sent a shot across the bow of European countries, illustrating that the financial markets do not believe that they are doing enough to balance their finances and they need to start acting now to sort the European financial problems out.
The European Union needs to quickly come up with a plan that will deal with the problems in Greece and also the Italian debt crisis. Most countries in Europe need to make significant cuts in expenditure and need to have in place positive plans to balance budgets. They also all need to improve economic growth and become more competitive.
The UK has retained its triple A credit rating, despite also having large debts. However the ratings agencies have more confidence in the UK because they have plans in place and are taking positive steps to address and deal with its financial problems.
Other countries in Europe suffering will also have negative consequences for the UK, so it is important for all our neighbours to make positive plans so that we can all make a good financial recovery. As the financial economies improve so will our lending institutions’ ability to lend. However, to help growth investment is required so the speed of any growth maybe very much dependant on the lending institutions and how willing there are to lend. Therefore the availability of commercial mortgages and bridging loans may very much determine the speed of our financial recovery.
What is Bridging Finance Used For?
Think of bridging finance and the first, and quite often only, use that springs into many peoples’ heads is something that is used to bridge a gap in finances when buying and selling a property. Indeed bridging finance has for decades been used to complete property purchases before the sale of another property. Bridging finance raises the funds required to complete the new purchase and is repaid once the sale of the existing property has completed.
This is just one use of bridging finance. Due to the speed with which bridging loans can be arranged, their flexible lending criteria, and as a short term finance option they are often the most cost effective option, bridging loans have many other uses.
The fact that it is possible to arrange bridging loans in just 48 hours, in addition to them being able to be used for any legal purpose, makes them a popular option when funds are required urgently. For example, to stop a repossession, pay an urgent tax or VAT bill, purchase a bargain, cover a gap in cash flow because someone has failed to pay you or some unforeseen circumstances.
Flexible lending criteria makes bridging finance a popular option when other lending options are not available due to stricter criteria. Bridging finance providers have more flexible criteria than other lenders meaning that a poor credit history such as missed finance repayments, county court judgements and defaults do not necessarily exclude them from providing bridging loans. In addition they are also more flexible about income proof or confirmation, since they are only providing a short term loan.
Also as part of their flexible lending criteria bridging lenders will often lend using property as security which is derelict, run down or in a very poor state of repair. Many traditional lenders will refuse to lend on property that requires repair work or has other issues, meaning that in order to secure funds on certain types of property bridging loans can often be the only option.
The speed with which they can be arranged, flexible lending criteria and flexibility over the type of security property, makes bridging loans a popular option for funding auction purchases and also for purchasing and funding small development projects when run down properties are renovated, converted or have a complete change of use. For example buying an old run down pub and converting it to a residential house or into flats.
Because bridging loans are only a short term finance option, once the work has been completed the property will then either be sold in order to repay the bridging loan and make a profit, or it will be refinanced using a long term finance facility and kept as an investment property, in which case it will probably be rented out.
Bridging Finance Considerations
Bridging finance is a short term method of borrowing that has many uses and also advantages over other forms of finance. However bridging finance is a short term method of finance and should not be considered as a long term option or solution.
There are many occasions when short term finance is required, for example when buying and selling a property and there is a time gap in the sale chain, or when purchasing a bargain property which you intend to sell on, or flip, for a quick profit. Bridging finance usually has a high monthly rate of interest, hence one of the reasons as to why they are not a suitable long term method of finance, but many bridging loans do not have any exit or early redemption fees.
When buying a bargain, or other times when funds are required just for the short term, it is also common that the funds are usually required quickly. Another advantage of bridging finance is that they can be put in place quickly. Although 24 to 48 hours is possible, 5 to 14 days is more usual and when considering bridging finance the time scales should be remembered.
Before taking out bridging finance it is very important to have a plan about how the bridging loan will be repaid. An exit strategy is crucial because not having a reliable one could prove to be a very expensive mistake. Typical exit strategies usually involve the sale of property, refinancing for a more suitable long term finance option or receiving repayment for money owed. It is important to look at any exit strategy to see how safe it is. For example is the refinance option viable, especially since lending criteria is more stringent these days. What would happen if the refinance option was to fail? If repaying the bridging loan is dependant on the sale of a property what if the sale falls through? Have contracts already been exchanged or are you still looking for a buyer? If the property had to be sold quickly what would be a realistic sale price and with that in mind is the whole project still financially viable? If the bridging loan is going to be repaid through the repayment of a debt, how sure are you that the debt will be repaid to you? What if it isn’t, do you have other options?
Many bridging loans offer a facility that allows for the monthly interest costs to be added to the loan. This therefore means that monthly payments do not have to be made each month, but are paid at the end of the bridging agreement when the monthly interest payments for the period of the bridging loan are added to the redemption figure.
Bridging finance and medium term loans
As most of us are fully aware since the credit crunch the traditional lenders have significantly tightened up their lending criteria, making it more difficult to obtain mortgages, loans, credit cards and other forms of finance. Even loans and finance facilities that can be secured on valuable property assets are more difficult to obtain, as lenders have reduced their loan to value requirements and tightened their income ratios and credit worthiness requirements.
Consequently many customers who would have normally been able to secure finance facilities without experiencing any problems before the credit crunch, have been unable to do so since. People who require finance in order to trade or grow their businesses but who have been declined through their normal sources have looked elsewhere and some have found suitable facilities through commercial bridging finance.
However bridging loans are specifically meant to be used as a short term method of borrowing for periods of up to 6 months or an absolute maximum of 12 months. Bridging loans have much more flexible underwriting criteria meaning that people who have been unable to find finance elsewhere have been able to obtain bridging finance.
This is all well and good if the money is to be used to fund short term projects, but if the money is required for longer periods than a year, or there is a risk that repaying the loan could take longer than first hoped, bridging loans should be avoided.
Due to the tighter lending criteria of the banks, and the subsequent increase in demand for bridging loans, some bridging finance providers are beginning to provide medium term loans.
Medium term loans offer the flexible underwriting found with a bridging loan, but rather than being a short term loan of up to 12 months, they offer finance facilities for periods of up to 3 years. Rolling up the interest is not generally an option, so monthly interest payments have to be made. Due to the longer term of the loan interest rates do tend to be cheaper than for bridging loans.
Medium term loans are an option for people who have been unable to secure finance through their more traditional sources but urgently need to raise finance for the short term. They are useful provided there is method of repaying the loan within a 3 year period, but should not be considered as a temporary measure if there is no firm plan about how the loan is going to be repaid.
