Using bridging to address complex cases
By Paresh Raja -
2020 has offered plenty of useful lessons to take heed of. While it has been a disruptive and challenging year for the majority of sectors, it has also given us an opportunity to understand how well certain businesses and organisations can adapt to change.
This is particularly true when looking at the property market, and specifically, the lending sector.
When the first UK-wide lockdown was implemented in March, mainstream lenders and mortgage providers retreated from the market.
Products were taken off the shelf, application times increased dramatically, and complex cases had a high risk of being denied.
With so much uncertainty in the air, big banks were opting to minimise their risk exposure rather than adapting to new market conditions.
This mass retreat had a huge impact on the property market. Suddenly, securing finance from mainstream avenues became extremely difficult.
It also put a significant number of existing transactions at the time at risk of collapsing.
Thankfully, alternative lenders with access to in-house credit lines were able to support transactions during this time, ensuring sales were completed despite the obvious challenges.
With lockdown measures gradually eased, traditional lenders have been returning to the loan market.
However, traditional lenders are still risk averse – the number of available products is still limited, and the processing times are still taking longer.
Importantly, brokers and borrowers have reacted by looking beyond the high street and considering alternative forms of finance like bridging loans.
Established lenders have been actively supporting buyers, offering tailored loans that cater to the need of each case. This is helped by the fact that some of these lenders have immediate access to in-house credit.
To highlight how bridging loans can be used in complex situations, I would like to discuss two cases Market Financial Solutions (MFS) recently dealt with.
Commercial to residential
Recently, MFS was approached by a client in need of a conversion bridging loan.
The request was for £200,000 with 60% loan-to-value (LTV), with the loan to be used to fund the conversion of the client’s commercial property into a residential one.
Importantly, they needed a reliable, fast lender with experience lending to a limited company.
Of particular note was that, at this point, the client hadn’t received the planning permission needed to purchase one of the residential properties connected to the commercial plot.
Many lenders wouldn’t even consider accepting an application for a project yet to receive all the required permissions.
However, MFS reviewed the application objectively and in its totality.
We concluded that the expected high demand for these properties combined with the client’s strong track record represented enough reassurance for our underwriters to approve the loan.
As a result, we were able to deploy the loan within days of the enquiry being received, with a suitable exit strategy in place.
Supporting landlords with bridging
Since the start of the year, save-haven assets such as buy-to-let (BTL) properties have been in high demand.
Earlier this year, MFS was in touch with a British expat who had been rejected for a mortgage at the critical closing stages of a BTL investment. As a result, the needed funding fast.
MFS were happy to help, lending them £1,750,000 at 61% LTV for their new venture through the client’s own Limited Company.
The client used their pre-existing portfolio of unencumbered BTL properties as collateral, and we were able to approve their bridging loan application in a number of hours.
However, it was later divulged that two of the company’s shareholders were under the minimum age requirement to receive one of our loans.
Under traditional loan underwriting processes, this complication could have taken whole days to be resolved, wasting crucial time for both the lender and the borrower.
MFS’ expertise, though, meant that we were quickly able to provide an alternative solution by working closely with both parties’ legal teams.
In both these situations, the efficiency and expertise possessed by MFS meant that our clients were able to complete on their transactions quickly and without further complication.
It shows how alternative finance can be used to support complex cases where timing is crucial.
Understanding the benefits of bridging
I believe COVID-19 has led to a new-found appreciation of bridging loans across the UK’s financial sector.
Although the total number of loans being deployed is still lower than during March 2020, a recent bridging trends report revealed a 46% increase in bridging loan volumes between Q2 and Q3. I see no reason why this trend won’t continue.
Afterall, the property market has been alive with activity following the introduction of the Stamp Duty holiday.
Given there is still much uncertainty that the property market will have to content with in 2021, from COVID-19 to Brexit, brokers and buyers are likely to encounter the same challenges they faced in 2020 when arranging finance.
That’s why it makes sense for them to consider options beyond the high street, particularly when faced with unconventional cases. As demonstrated in the above cases, bridging loans can be a credible option.
Paresh Raja has an extensive background at one of the Big 4 consultancy firms, specialising in structured finance, and a long-standing career in the commercial and specialist lending sector. He is therefore well placed to discuss anything bridging finance specific, or business more generally. Paresh is now the CEO at Market Financial Solutions which he has developed to become a leading name in the bridging finance space.