Chris Stevens, Recognise Bank’s Bridging Specialist, explains reasons behind the growing popularity of bridge-to-loan facilities
The advantages of bridging loans are well known among borrowers looking for speed and flexibility — especially if they’re buying at an auction or wanting to acquire a new property while still in the process of disposing of an existing one.
Being able to act quickly on a purchase because they know they have short-term finance in place gives property investors more confidence.
What probably isn’t as well known is what options are available to borrowers at the end of their bridging deal. Do they sell the property, try and find a longer-term loan, or look for another bridging loan? They might have decided to keep the property the bridging loan was initially used for.
These are decisions that can be complicated for borrowers, particularly if their plans change. It could also mean that they must start their funding search once again, trying to find a lender who will provide a longer-term loan on an asset that was originally only considered for short-term finance. This could also trigger a whole new wave of activity, such as surveys, valuations and legal work, which brings additional costs and uncertainty.
However, there is an alternative option — bridge-to-term, which is growing in popularity among property investors, although it’s not offered by all lenders. As the term suggests, this loan provides the borrower with the short-term bridging facility they need to be flexible and move quickly on an initial purchase, while also having the option to transition into a longer-term loan later. It’s a great option if a buyer decides that their new acquisition will be a good addition to their existing portfolio, for example.
The big advantage of a bridge-to-term loan is that the administration and paperwork can be done with a single lender, cutting down the hassle and the cost of trying to switch from the bridging provider to another lender.
With our bridging loans, the borrower can state from the beginning that they may want to move to a longer-term loan. This is taken into consideration when we review the application, so we can tell the borrower how much the loan would cost if they decided to move to a term product. But importantly, we execute the facility in the same way as we do any bridging loan, giving the customer the speed and flexibility they need.
If they choose to dispose of the property, then the bridging loan is settled as per usual. If they decide that they want to move to a longer-term product, the borrower knows they have a lender that understands their circumstances, is familiar with the property, and can proceed with the term loan in a timely manner. They don’t need to start from scratch with a new lender, and thus avoid all the time, effort and additional costs that entails, including the likely requirement for further legal due diligence and revaluation of the property.
From an adviser’s perspective, this also gives them more options to offer their clients when they are looking for bridging loans. Knowing they can recommend a lender that can accommodate the short-term facility with the option of moving to a longer-term loan means they can support their customers in any circumstance.
For property investors, this provides them with maximum flexibility to manage their portfolios and run their businesses as they want, without having to spend lots of time hunting down different finance options if their plans change.
Not all lenders offer bridge-to-term options, because they want to focus on being a bridging specialist or perhaps they want to concentrate on standard commercial property loans. But I know that approach doesn’t suit a growing number of borrowers because, as the market changes, so will their funding needs. This also means clients will want to work with advisers and lenders that can provide them with this type of borrowing and can guide them through the process, whatever route they decide to take.
Lenders must also have the right lending options available for when the bridging loan finishes, whether it’s a commercial property loan or something a bit more specialist, such as a BTL loan for professional landlords.
A lot of lenders can’t offer this tailored approach because they have pulled back from big chunks of the market and have also cut back on the number of relationship managers out on the road talking to advisers and customers.
Instead, they’ve forced borrowers down an automated, tick box route, offering products that won’t always provide customers with the flexibility that bridge-to-term offers. Frustratingly for customers, it also usually means they can’t have a proper conversation with an expert to talk about their options either.
It’s one of the main reasons that Recognise Bank has put so much focus on personal relationships — it’s because of these relationships that we know there is a growing demand for bridge-to-term.
Ultimately, being more pragmatic and responsive about the type of loans on offer will pay dividends to both the lender and the adviser. Not only is it a better service for borrowers, it will also help to build longer-term, trusted relationships with clients.
This article was originally published in Bridging and Commercial on 15 February, 2022