Offering short-term deals at a higher loan-to-value could mean excellent business so long as it is applied responsibly
It is often said that time is the most precious commodity in life. When I think about the reasons why bridging finance has proved increasingly popular, it all boils down to time. Borrowers are buying more time. Time to sell, time to renovate, time for adverse credit to age or for that business transaction to conclude.
Bridging finance relies on three major advantages to that of term mortgages. The first is interest structuring, meaning repayments can be capitalised rather than serviced. Second, loans are available on virtually every asset class and condition. And, third, lenders are available to cater for most forms of credit profile, so long as a credible exit strategy exists. Bridging finance enables borrowers time to change one or more aspects of their personal or corporate risk profile, or change the condition of security.
The last six months have brought huge change to short-term lending, with fierce competition from banks driving down interest rates. Secondary and tertiary tier lenders are unable to match pricing but need to grow lending volumes, so they may have to consider increasing risk to justify interest charged. This has manifested via increases in loan-to-value.First-charge and second-charge lending is commonly available at 70 per cent LTV and a handful of lenders offer first-charge lending at 75 per cent LTV.
Recently, three small lenders launched products up to 80 per cent LTV and I under-stand a large, well-known lender is preparing to launch at 80 per cent.The pricing for high LTV lending is north of 1 per cent per month. This is significantly more expensive than sub-75 per cent options but sometimes a transaction can only work at this level, so higher pricing is an unwelcome necessity. From an intermediary perspective, we welcome any meaningful improvements in products that provide enhanced customer choice.
Lending at higher LTVs could represent excellent business when applied responsibly. Notwith-standing fraud, the greatest risks in short-term lending are surveyor negligence, default charges eroding equity and actual value realised in the event of enforcing security. Depending on the asset, surveyors could be permitted between 5 per cent to 15 per cent tolerances. Usually, lower margins of error are applied to “standard” residential property; higher for one-off property or where the security has exceptional features. If a loan requires security to be enforced, then a number of disposal options exist. But it is likely the marketing period prior to disposal will be between 90 and 180 days, hence many bridging lenders to either lend or be strongly influenced by these valuation assumptions prior to granting a facility.
A 180-day value can be between 5 to 15 per cent lower than open market value and 90-day as much as 10 per cent to 25 per cent. With this in mind, it becomes quite apparent the potential risk for capital loss at higher LTVs. This is without the underlying risk of negative price inflation.
It is of paramount importance to ensure recommendations regarding debt quantum are suitable, especially when higher LTV borrowing is achieved at a considerably higher cost. From moving to 80 per cent LTV from 70 or 75 per cent means higher pricing is applied across the whole facility, not just an extra 5 or 10 per cent. Analysing the real cost of this capital can be quite shocking and it is important to advise clients of this fact and ensure cheaper forms of borrowing are not available.
Chris Fairfax is managing director at Positive Lending