Your IndustryApr 18 2013

Bridging loans and when to recommend them

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“Bridging loans provide a source of immediate finance to clients wishing to purchase or refinance a commercial or residential property for a short-term period of usually up to a maximum of one year,” says Rob Jupp, chief executive officer of Brightstar Financial.

These loans are a temporary cash injection intended to ‘bridge’ the borrower until such a point when other funds become available to pay off the loan, adds Danny Waters, CEO of Enterprise Finance. The pay-off is known as the ‘exit’.

“All lenders will want to see a viable ‘exit’ strategy before they offer a bridging loan,” he warns. “The most common exit strategy is a remortgage through a high street lender, but the sale of the property could also constitute an exit.”

Different lenders will be comfortable with different kinds of exit, but the end use of the loan is unimportant, says Jonathan Samuels, CEO of Dragonfly Property Finance.

“Bridging loans can pretty much be used for anything as long as the lender is happy with the security and the exit,” he notes.

Bridging loans are often used by professional property investors and landlords to quickly acquire sought-after property and refurbish it before refinancing away to a mainstream lender.

They are suitable for a variety of other circumstances, such as raising capital for business, says David Kinane, partner at Paxton Private Finance.

But he cautions: “It is important to note that bridging loans are no replacement for long-term facilities and advisers should exercise caution where there is no defined exit route for the short-term facility.

Neither should short-term finance be considered as a means of obtaining funds where normal lending sources are closed because of a poor credit history, continues Mr Jupp.

Traditional bridging loans are always secured on property, by first or second legal mortgage, although other short-term asset lenders will lend against most personal assets such as cars, boats, antiques, jewellery and paintings.

Loan providers have different perceptions of suitable assets to secure against, as Mr Kinane says, so it is therefore necessary to check the position of each an individual provider.

“Lending against a personal asset should only be considered if the temporary loss of the asset being held by the lender and used as security does not cause other problems,” concludes Mr Jupp.

To get their cut, advisers may be paid an introductory fee or commission by the lender and can also charge a fee of their own which can be added to the loan in many cases, although these amounts do vary from lender to lender.

It is important to note that any fee paid will be disclosed to the borrower.