We’ve been talking to our brokers and borrowers about what matters to them in a short term property finance deal, an area which our firm, Avamore, specialises in. If you’re not familiar with bridging loans, they are typically used by borrowers who need to draw cash quickly and only for a short period of time. This can be for a variety of reasons (purchase, refinance, equity release, refurbishment etc) which we can go into detail on in another post. Here’s some of the main things that matter in a bridging loan or short term property finance deal:
- Speed – the ability to react quickly when making an offer could be the difference in securing a deal or losing a deal. In fact, it could be the difference between losing a deposit or not (potentially £100,000s). Speed comes in many forms – speed of offer, speed of due diligence and speed of drawdown. If time is of the essence, make sure you’ve a lender that is able to perform for you in the timeframe you need them to.
- Certainty – one broker said to us “beware the cheap money that never arrives”. Many volume lenders can offer very attractive pricing initially to secure the deal but not deliver. But if that lender consistently finds issues with the deal or deliberately delays unnecessarily, what then? If the deal is lost or delayed because the lender cannot deliver on their offer, that is a disaster scenario with time, money and effort all wasted. It is imperative that all offers are delivered on and it is only acceptable for an offer to be withdrawn or delayed following a material due diligence finding or negative valuation.
- Interest Rate – the cost of money is one of the most important differences between lenders. If your case is simple and you do not need the cash exceptionally quickly, interest rate should be a priority and you should seek out a lender offering the best price. However, bridging loans are for a short term. A 0.1% per month difference in pricing doesn’t add up to that much over 3-6 months if that’s how long you need the money for, especially if that cheaper lender is so slow it costs you the deal in the end.
- Leverage – many borrowers want to borrow as much money as possible. Others do not. Key considerations when looking at leverage are a) pricing and b) risk:
- Pricing: Leverage in short term lending caps out at 70-75% LTV of the net loan based on a single asset. Do not expect to be able to push beyond this level under any circumstance unless you are prepared to pay exceptionally high rates. Probability of funding falls dramatically over 70% LTV. If you wish to borrow more than 70% of the property value, incrementally this money could cost you over 20% per annum (or more depending on risk).
- Risk: Many lenders may not go over 70% LTV regardless of pricing because they determine the risk of losing their investment to be too great to be willing to advance the capital.
- Fees – bridging loan brokers need to be remunerated as there is a lot of work involved presenting a borrower’s case to lenders. Most brokers are going to receive a fee from the borrower and also part of the arrangement fee charged by the lender. Unless your case is very simple and you can source the finance directly as a borrower, you should be willing to make sure the broker is well remunerated to ensure the loan proceeds.
- Term Length – how long you borrow the loan for is an important consideration. You want to borrow from a bridging lender a) long enough to achieve your goal (refurbishment, development finance, planning) but b) not so long that you accrue too much interest (given that a bridging loans are more expensive than longer term loans from High St banks). For example, if you are trying to sell a property that you have just completed and want to release some equity for your next project, you may find that 3 months facility is probably not long enough and 9 months might be too long as the property will sell sooner. In that situation a 6 month facility would be about right. Bear in mind that if the facility rolls up interest, the gross facility will increase the longer the term, and the arrangement fee will increase accordingly as the gross facility will be larger.
- Minimum interest – the cost of acquisition for a lender is exceptionally high and no lender is going to want to lend to a borrower without the certainty of at least 2-3 months of interest being guaranteed. We have seen some borrowers fight on this point but in practice, we have never seen a loan repaid in under 3-4 months, with few exceptions.
- Early repayment penalties – linked to term length and minimum interest. Some lenders will have to guarantee their funders/investors a minimum return. If the loan is repaid earlier than intended then it could cost the lender money. Hence the need for repayment penalties to make the funders “whole”. Although not something charged by Avamore we would recommend to borrowers borrowing from other lenders that do charge repayment penalties that they pay heed to comments above relating to Term. The shorter the term, the less the repayment penalties can be.
- Personal service – This is something we champion at Avamore. The question you have to ask as a borrower (and equally relevant for a broker) – is my lender going to pull out all the stops for me to get this deal done? Many “volume” bridging lenders specialise only in vanilla situations and won’t consider deals that require a lender to take a view (such as condition, valuation, refurbishment or planning). In addition, many lending platforms are manned by employees that are salaried and may not be as incentivised to see the loan complete. It is important to have a lender that prioritises your case and is willing to go the extra mile for you. If that means staying in the office until 11pm on the stamp duty deadline to save a customer 2% in stamp duty, so be it (something which we did – see photo of Zuhair below from that night!)
If you are a borrower and have a set of terms from a lender and you are unsure whether they are fair or not, please get in touch and we would be delighted to give you an impartial view. We might be able to offer you a set of terms that better match your expectations or hopes. To talk to us email md@