How big is the market
- The number of non-regulated bridging loans in the market is £2.5bn
- Specialist bridging finance lenders like Mayfair Bridging have taken over the market and have practically omitted the high street banks. (Companies House, CIL analysis, competitor interviews)
- The bridging loan market has been driven by the auction market. As the popularity of the auction has grown so has the bridging finance sector.. Values increased by 36% between 2001 and 2004. (Royal Institute of Chartered Surveyors)
- The bridging finance market has grown from £85m in 2000 to £723m in 2000. This represents an average annual growth rate of 122%.. (Company Accounts, bank of England, CIL interviews and analysis)
What is bridging finance?
Bridging finance is a premium product used when finance is required in a short period of time, until traditional forms of lending are in place. But bridging finance is no longer seen as ‘the last resort’; as its uses are not just restricted to property transactions.
When can bridging finance be used?
Bridging finance can be used for absolutely any purpose. Traditionally it has been used to complete on one property while awaiting the sale of another. Amongst it many other uses are:
Auction Purchases
At auction completion is required within 28 days. Unless the client has made the necessary financial arrangements then this is a very tight deadline. If completion does not happen within 28 days the client will lose his deposit. Bridging finance is used to purchase the property. Once a remortgage has been arranged it is then used to redeem the bridging loan. By using bridging finance for an auction purchase, the client is confident going into auction, not worrying about losing his deposit. Sometimes clients will require finance for the deposit as well and a charge is taken on another property to bring the total LTV to 100%.
Renovating Property or Buy to Sell
Many clients see a property they like but sometimes the valuation reveals it is not mortgageable. As Mayfair Bridging base their bridging finance on the Open Market Value of the property, the client can take out a bridging loan to renovate the property to sell at a profit or take out a traditional btl mortgage in order to keep the property as an investment.
Below Market Value Purchase
Conventional lending is based on the purchase price of the property whereas MB offer bridging finance based on the OMV of the property. This is great if an investor has sourced a below market value property as in many scenarios he can purchase the property without putting in any cash.
Cash-flow Assistance
Many small to medium companies are in a temporary position where they need some cash-flow assistance for a short period in order to purchase stock or for any other reason. Many new businesses find it difficult trying to obtain a factoring (Invoice finance) facility from their bank due to their inability to produce accounts and references or they trade in a high risk sector. Also by the time a facility is obtained from the high street bank, in many cases they are too late for the deal or in a worst scenario facing bankruptcy.
Bridging finance is not just for property related transactions as it can help many companies with their cash-flow problems. By taking a first charge on their business premises, it gives them the ability to obtain finance very quickly when it comes to helping their cash-flow. By using bridging finance the company will not be involved with the red-tape of going to their high street bank. This is ideal as they require the facility for a short period only.
Overseas Property Acquisition
Clients are very keen to purchase property abroad and investors are sometimes in a position where they can purchase property at below market value. In a very active overseas property market, clients sometimes just have hours to decide whether they wish to go for an off plan development and require the deposit in the first instance.
Clients can use bridging finance to purchase the overseas property by taking a first legal charge on their UK property. Once the overseas property is acquired they can arrange a suitable remortgage to redeem the bridging loan.
Meeting Tax Liabilities
Many businesses face a sudden tax bill where it would come with a deadline. Sourcing a traditional mortgage within the allocated time would be very difficult and the business could face prosecution and interest on their bill. The company can take out a bridging loan secured on their business premises to pay the tax bill.
Business Acquisition
Bridging finance can be used to acquire a business. This is an excellent avenue for finance especially if the new owner has no experience in running a business in this sector and has no accounts or projections to show to the bank. |
