Should more brokers and lenders be looking at small bridging loans?
By Joanne Atkin -
Many bridging lenders won’t lend below £250,000 and even more will certainly not consider sub £100,000. But there is a market for smaller bridging loans and a few players think it is worthwhile.
The lenders in this space tend to start with a minimum loan of £26,000 but Holme Finance Bridging Solutions (HFBS) will lend as little as £10,000.
But for that small amount, is it worth it for the client? Surely fees would make the loan too expensive. Not necessarily, says Ian Broadbent, managing director of HFBS, whose firm will lend from £10,000 to £250,000.
Broadbent admits that under normal circumstances it is probably not worth using a bridging loan for small amounts. He explains: “Most bridging lenders require two sets of solicitors, one acting for the lender and one for the client. So that means paying solicitor fees on top of other charges.
“But we have a very unique way of doing things as the vast majority of our bridging loans have no solicitor involvement. If you take those legal costs out then it can be cost effective for the client.
“We carry out basic conveyancing in-house. You can get a straightforward, registered title online in about 30 seconds if you know how to read that title. By doing Google and Land Registry searches you can cut out local authorities searches.”
HFBS specialises in dealing with straightforward applications so clients are generally individuals, as opposed to the likes of special purpose vehicles and offshore trusts, and the property will have a standard legal title.
Broadbent says: “Most of our bridgers are relatively inexperienced borrowers. They tend to be people who are starting in the low value buy-to-let market and if they do well they may then want to develop their portfolio.”
HFBS also takes a view on whether a valuation is required and that depends on the information available. In around 70% of cases HFBS does not require a valuation, which again keeps the costs down for the client.
Broadbent explains: “We use a combination of information. This can be the purchase price shown at the Land Registry as that is a good guide to what has been paid recently. It could be a valuation carried out within the last couple of years by another party such as a mortgage lender. We can also use AVMs and our own property inspection.
Charterbank, which provides bridging finance from £26,000 to £500,000, insists on solicitors being used by both parties, but it does do its own valuations.
Tom Branson, director at Charterbank, comments: “We inspect the property to satisfy ourselves and that keeps the costs down. We do a lot of desktop work remotely, then value it on-site. We don’t use AVMs as we carry out our own investigations.”
Why take out a short-term bridging loan?
There are various reasons people take out smaller bridging loans and some examples are cited here.
Branson says: “Quite a lot of the small loans we do would be to finish projects that are owned outright but clients have exhausted all their cash resources. They just need that final bit to push the project over the line.
“We do classic bridging, where the client does not have enough cash to buy the next property, but wants to secure it before the current project has sold. Or a property owner wants to refresh a property between tenants and remortgage it once the improvements have been made.”
Broadbent adds: “We have clients with a short-term need because their business has suffered, whether that is Covid related or not. They may have a cash flow issue and are able to offer commercial or residential premises as security. We’ve also had people who want to complete on purchases abroad who have needed deposit funds.
“As long as there is an asset as security, legal title with a value to it and the client has a sensible exit strategy, they can borrow money for any purpose they wish.”
Brokers and smaller loans
Some brokers are also seeing demand for smaller bridging loans. Ali Sanders, director at Auction Finance Pro, says the smallest bridging loan she has dealt with this year was £35,000.
She comments: “A lot of people I speak to are looking to buy and do up investment properties. To make a good return on property you have to add value and refinance off the back of it. Typically, investors are buying in places like Liverpool, Yorkshire and Wales where you can buy a property for £50,000.
“It’s a case of getting lenders to support those projects knowing there is going to be an uplift in the value. A lender’s minimum loan could be £50,000 but they may go lower if they can see the refinance is going to meet their minimum loan amount.”
Sanders notes that more people are going to property seminars but they don’t have a massive chunk of money, so a small bridging loan might be a good option to get started in property development.
Kim McGinley, director at VIBE Finance, is also receiving more enquiries and agrees there is an increase in activity in the North with the focus on lower value properties. She says the bulk of lending is above £50,000 and that rates can also be higher for smaller loans, depending on the lender.
She says: “There has been more demand in recent months and the main reasons we deal with lower bridging loans are for property development and refurbishment. Some people are looking at two or three projects at the same time, some are buying at auction and want the speed element.”
Small bridging loans for business use
Sarah Fisher, director at Kensington Shorre, agrees that some brokers in Wales and Scotland might access smaller bridging loans for property acquisition because it is possible to buy lower value properties.
But she says the sub £100,000 space in the bridging market has been dominated by second charge for business use such as getting a business off the ground or buying stock for a large contract.
Fisher gives this example: “A client wants to purchase a property but need 100% funding but no lender will leverage 100% against one asset. A lender could take a first charge at 100% then a £50,000 slip but this is ancillary security to top up the original deal.”
Impact of coronavirus business loans
The sub £100,000 bridging market has been active for several years but Covid-19 has changed that, says Fisher. The smaller bridging loans market has been impacted by the Coronavirus Business Interruption Loan Scheme (CBILS) offering loans up to £5 million; and the Bounce Back Loan Scheme (BBLS) – loans ranging from £2,000 to £50,000 at an interest rate of 2.5%.
These government schemes were introduced to provide financial support to smaller businesses affected by coronavirus and are set to end on 30 November. The loans can last for up to six years and there are no interest payments for the first 12 months.
Broadbent says the government support schemes have had a very moderate impact on HFBS business but he did say: “A number of clients have used those facilities to repay bridging loans, which is sensible because these government loans are low cost and borrowers can use them to repay a high cost debt.”
Small bridging loans can be a nice little earner
Broadbent believes that brokers should not dismiss smaller bridging loans as they can earn money without having to put too much effort in.
He comments: “We can build in a sensible level of earning with a minimal amount of work for the broker and a very quick turnaround. So smaller loans can be brokers’ bread and butter and the big deals are the jam on top.
“We are happy to carry out most of the work required in respect of an application so these loans can be very profitable for brokers.”
HFBS will pay brokers a flat commission of 1% plus they will get a fee from their client.
Branson agrees: “We try to take away as much work from brokers as possible. Once they have made a good quality introduction, we can effectively take over from there, if they want us to, leaving them free to spend more time on more lucrative cases.”
Charterbank charges a 2% arrangement fee which is split 50/50 with the broker, while smaller loans (under £100,000) are often subject to a minimum fee fixed at £2,000.