Let’s start with the basics. A bridging loan, as the name suggests, is used to ‘bridge a financial gap’ over the short term. This can be anything from 24 hours to three years, and is usually related to commercial and private property. For example, an individual purchasing at auction is required to pay immediately, but may not have funds available from their current property. This is where short-term access to external finance can come into its own, particularly when dealing with sums requiring a more bespoke approach, such as over £5m.
Up until the sub-prime financial crisis of 2007/8, the market was largely dominated by high-street banks, but the picture over the past decade has changed markedly. In part, this is due to the fact that everyday institutions have taken a more risk averse approach to financial products, which bridging loans are deemed to fall under. They also weren’t best placed or agile enough to deal with the requirements and capital involved with high-end, luxury property sales, especially in a post-bailout world. This, though, was not the end of the story. As with most things in the financial world, when a gap in the market forms, it’s quickly filled through alternative methods.
Types of borrowing
So, who in 2020 is happy to provide this kind of short-term financing?
Private banks, peer-to-peer lenders, specialist bridging loan firms and other high-net-worth individuals are the main players, and they lend in a couple of key ways.
The first is by securing a charge against a fixed asset, such as property. As highlighted before, a good example is when purchasing at auction and alike. A client borrows the money, repaying the original sum plus interest once a sale has gone through.
A second option is to service the interest on a monthly basis. I.e. by agreeing on 1% per month, to be paid regardless of outside sales. This can be rolled up into a more conventional yearly sum, too.
Why a bridging loan?
But, why would you choose this type of financing? Well, there are arguably three main reasons why a bridging loan is the right choice for sums more than £5m.
- Speed. Even with a private bank, onboarding, approval and regulation mean it can often take, despite the best intentions, 6-8 weeks for money to exchange hands. For obvious reasons, this may not work within the timeframe you had in mind.
- Privacy. A popular method of financing is through specific bridging lenders or other high-net-worth individuals. This often results in fewer regulatory hoops to jump through, which inevitably speeds up the process and grants the client a greater degree of privacy – a price usually reflected in higher levels of interest compared to the more traditional, slower financing options. When looking at the luxury housing market, the interest premium connected to privacy may be a price worth paying.
- Flexibility. Due to dealing with smaller, nimbler teams, you tend to come into direct contact with decision makers sooner rather than later. As a result, agreeing on a tailored, flexible plan is typically easier compared to a mainstream institution.
Covid-19 and lockdown
It’s hard to avoid and certainly a topic that needs to be addressed. However, bridging loans and their lenders are likely to be more resilient to the financial reverberations associated with the global pandemic than their high-street counterparts. As outlined earlier, bridging loans are usually provided by small, nimble, tailored firms. They’re not hindered by red tape or wrapped up in layers of bureaucracy. They can assess situations on a case-by-case basis, gearing their expertise to the client, while being able to produce valuations and reports based on their close relationships with surveyors — albeit through the lens of the Covid-19 landscape.
How can Enness help?
At Enness, our independent status gives us the opportunity to talk with the entire market of bridging finance providers. We don’t have any restrictions, which has allowed us to build strong-and-trustworthy relationships with a wide variety of lenders. We will listen to your needs and tailor our approach accordingly. We know who is going to complement your income and future plans, without the need for a scatter-gun approach to finding you the right deal.
If you are unsure whether bridging finance best suits your current situation and plans, or perhaps you are looking for an improvement on rates, feel free to call us for a no obligation chat.