There is no doubt that the UK government has committed huge funding to landlords, tenants, businesses, employees and employers over the last few weeks. Defined commitments total more than £330 billion with an open-ended commitment to helping employees and employers during these difficult times. However, as the Covid-19 virus continues to wreak havoc across society, businesses and money markets, the bridging loan sector is coming under pressure.
Bridging loan repayment delays, exit routes and availability
While the UK government has attempted to cover all bases with regards to business/domestic funding, this is to all intents and purposes an impossible task. It would be commercial suicide for the government to use taxpayer’s money to guarantee loans to businesses/individuals which are unfortunately no longer viable. As a consequence, homeowners, businesses and property developer may well find funding tighter in the coming weeks with more focus on their long-term viability. However, if you dig a little deeper with regards to bridging loans, the situation is more complex.
Project delays
During the Covid-19 pandemic, there is no property project across the country which has not been impacted to some extent. There may be issues with short-term liquidity, supply chains, availability of employees/contractors and the challenge of working under government restrictions. When you also add the likelihood of a reduction in short-term property prices as a consequence of the economic impact of Covid-19, a difficult environment just got much worse.
Exit routes and refinancing
The vast majority of property projects will utilise short-term bridging finance to some extent as a means of funding renovations and rebuilds. The idea is simple, secure short-term funding using assets available, finish the work and then refinance with a traditional mortgage on the higher value. This allows property developers to repay high-interest bridging loans and convert to more traditional mortgage finance.
The problem here is that as property project timescales come under pressure, as they inevitably will, this will in reality pushback bridging finance repayment/refinance dates. So, this leaves property investors with a dilemma. They will need to extend bridging finance in the short term, but many market participants are withdrawing, and rates are rising. When you consider that interest rates are simply a reflection of the risk/reward ratio, it is perhaps no surprise to learn the cost of this type of finance is ticking higher.
Personal bridging loans
Aside from the commercial activities of bridging loan companies, many homeowners have used bridging loans in recent times while “between” properties. There are several issues to consider here which include:-
• Reduced monthly income from employment
• Effective freezing of the domestic housing market
• Refinancing of short-term funding such as bridging loans
• Potential reduction in UK property prices in the short term
• Funding difficulties for potential home buyers
While there are various elements of financial assistance available in short to medium term, the crux of the matter will revolve around whether collateral and property prices will still support short-term funding. We’ve also seen several mortgage providers withdrawing from the market in the short term and mortgage interest rates starting to creep higher.
Engaging constructively with borrowers
Whether a domestic homeowner using bridging finance when “between properties” or a property development company dependent on bridging finance to cover redevelopment costs before refinancing, there is a need for lenders to engage with borrowers positively. The assumption that within 3 to 6 months, everything will be “back to normal” is ambitious at best and potentially negligent at worst. All investment markets are based upon a simple risk/reward ratio which determines the cost of assets/finance.
As the domestic housing and property development markets are effectively frozen at this moment in time, refinancing of short-term funding will not be easy for many. Therefore it seems inevitable that extensions/renewals of bridging finance arrangements will be in great demand. In a perfect world borrowers would be able to:-
• Utilise income from elsewhere to cover extended payments
• Inject new collateral to cover valuation shortfalls
Unfortunately, we are not living in a perfect world at the moment, and this is unlikely to change for some time to come. Therefore, if you have a bridging loan up for repayment/refinancing over the next 3 to 6 months, you must plan now. Borrowers and lenders should engage in positive communication to resolve any short-term issues. This ensures that both parties are moving forward with an idea of the potential challenges ahead rather than going in blind.
What can Enness do for you?
As an independent mortgage broker, we have access to more than 300 lenders spread right across the globe. We are not tied to any individuals or groups of lenders, and as a consequence, we can inject a huge degree of competition into funding negotiations. It looks as though the traditional Bridging finance market will struggle in the short to medium term. However, we also have access to niche lenders and private banks. Very often, these organisations will take a more flexible/long term approach to short-term financial difficulties to nurture a long-term relationship with their clients.
There is government finance out there and numerous options available, although some investors/property developers may fall through the cracks. We are talking about perfectly viable long-term property transactions and property developments coming under real pressure. Therefore, if you have bridging finance up for repayment/refinancing over the next 3 to 6 months, we would welcome the opportunity to talk to you about the options. We are experts in creating bespoke financial solutions which are sculptured around a client’s individual financial circumstances. This may be an individual using bridging finance between house moves or a developer in need of short-term funding to get through these difficult times.
We can present several potential refinancing options using real-time market rates. This allows you to compare and contrast both cash flow and short, medium and long-term financial liabilities against the potential benefits. There is still bridge funding available, the potential to negotiate competitive terms and ultimately navigate through what will inevitably be short-term difficulties for many. However, the key is to plan, start planning now……
