First and foremost, it is important that anyone taking out a bridging loan fully understands what that loan is about and how it works..
As long as they understand the product, know its timeframe and cost, and have an exit strategy, Mark Posniak, head of sales and marketing for Dragonfly Property Finance, says anyone can potentially take out a bridging loan.
Danny Waters, chief executive of Enterprise Finance, said a bridging loan can be used by people from all demographics and can be from as little as, say, £50,000 to £50m or beyond.
Traditionally bridging finance has been used to enable prospective buyers of property, usually residential, but also commercial. Bridging can be used, for example, to provide the funds for an auction purchase and redevelopment where the borrower intends to buy a property then renovate and sell it within the term of the bridging loan.
In the domestic market, the classic example would involve someone wishing to buy a new property before they achieved the sale of a current property they own and therefore need to fund the new property purchase prior to receiving the sale proceeds of that current property.
More recently, Alan Margolis, head of bridging at United Trust Bank, says the circumstances in which bridging finance is being used have significantly expanded.
For example, he notes bridging has been employed to refinance complex property portfolios in cases where an existing facility was due to expire and significant charges were to be incurred if not repaid.
“Bridging gives the customer extra breathing space to arrange a longer term refinance or sell some, or all, of their portfolio.”
Bridging has also been used in corporate transactions, Mr Margolis adds, where short-term funding, secured against the assets of the business or personal assets, is part of a plan to obtain longer-term financing.
Rob Jupp, incoming chairman of the Association of Bridging Professionals, said advisers should consider bridging for clients finding themself in the four following scenarios:
1) Broken chain. Where clients have found their dream home, but have either not yet sold their existing property, or perhaps the chain has broken down and they lost their buyer.
2) Auction purchase. When purchasing a property at auction, Mr Jupp said there are usually strict completion deadlines of 28 days, with a 10 per cent deposit being paid on the day of the auction.
3) Retention or renovation. If a property needs repair work in order to make it habitable, a conventional mortgage lender will often not lend until the works have been completed.
4) Discounted purchase. If clients have managed to source a property being offered at a discount from its open market value (OMV), for example, perhaps the person selling is in financial difficulty and needs to sell to avoid repossession, or perhaps they are just in a hurry to sell.
