Paul Mahoney: 00:29 Welcome to Proper Wealth with me, Paul Mahoney. This is the show where we discuss all things wealth creation including property. Joining me today is Daniel Owen-Parr from Together, and we’re going to be discussing bridging finance. Welcome, Daniel.
Daniel O.: 00:42 Welcome.
Paul Mahoney: 00:43 Perhaps we can start with what bridging finance is. We’ll start fairly simple and build up from there. Building finance as a product or an offering. What is it?
Daniel O.: 00:52 Bridging finance or what we call a short-term finance can just be a very short-term loan secured against property for a number of different uses. It’s normally very quickly set up, and it’s normally very flexible in what the client is looking for.
Paul Mahoney: 01:08 All right. So, generally looking at either someone who needs the money really quickly or for more flexible means. Is that fair to say?
Daniel O.: 01:18 It sits in, is regulated and there’s unregulated bridging, Just to give you a real simple understanding of that, anything that’s regulated means that either a client lives in it, they’re going to live in it or is more than 40% of their home. If we secure it against that, then it’s a regulated one. If it’s unregulated, that means then it could be just like an investment property, a commercial property. Something along those lines.
Paul Mahoney: 01:45 Somewhat similar to a standard mortgage.
Daniel O.: 01:47 Yes, exactly. That’s right.
Paul Mahoney: 01:48 Whether it’s related to where they live or whether it’s a commercial activity.
Daniel O.: 01:52 Yes. It’s exactly the same as doing a normal commercial loan, but it’s normally the speed or it’s the flexibility that the client is looking for compared to a standard mortgage process that we go through.
Paul Mahoney: 02:05 How long have bridging loans been available?
Daniel O.: 02:07 Bridging finance has been out there for years. If you go back historically, it was probably seen as a lender of last resorts. So it was, rather than going to your High Street Bank, if you couldn’t get one there, you would go and get a bridging loan. That’s really evolved over the last 10 years now. For the more savvy investor, it’s probably the lender of first resort now because of that speed.
Paul Mahoney: 02:31 In the past, it was more of a fallback?
Daniel O.: 02:33 Yes.
Paul Mahoney: 02:33 An expensive fallback, I assume.
Daniel O.: 02:35 Yes.
Paul Mahoney: 02:36 Now, people are actually using it for its speed. Even though perhaps, I assume, it does cost them a bit more than your traditional finance options.
Daniel O.: 02:45 Yes. If you went to your High Street Bank, what you’d pay a High Street Bank for a long-term facility, they don’t really equate. A short-term facility would be interest paid each month or it would be rolled up, but they would be a monthly charge for it, but if you think the average one probably lasts about seven months, what you entirely pay is relatively small compared to a long-term facility of the bank, but if you compare like-for-like, yes, it is more expensive.
Paul Mahoney: 03:13 I suppose that depends on what the person’s going to use the money for, doesn’t it? Rather them sitting around waiting months to get a mortgage or to get development finance, they might be able to get into an opportunity to make more money over those months by using bridging finance. Is that fair to say?
Daniel O.: 03:27 Yes. Very, very much so. It’s the opportunity cost.
Paul Mahoney: 03:30 Why do you think there’s been that shift? You mentioned about it being a fallback initially. Now, it’s something that more savvy investors are using for its speed. Why do you think that change?
Daniel O.: 03:41 There’s two main points on that. Firstly, after the financial crisis 2008, 2009, the main financial institutions which were the go-to place for anybody looking for finance have retrenched likely on their credit policies, so what they offer clients now isn’t the same as what was there 2008. When there’s a correction in the marketplace and they’ve left some of the traditional parts of finance, they’re looking at alternative finance, short-term finance providers who’ve come and filled that gap.
Daniel O.: 04:12 Secondly, is around the education piece. I think it’s known in the industry more now. It wasn’t just some small backstreet lender of such or the larger brokerages will offer this. People come directly to financial institutions. It’s really, especially through auction markets or for programs like yourself, we talk about it a lot more now. The education piece, people understand that. There are two main points on that.
Paul Mahoney: 04:39 There definitely does seem to be a boost in that side of the market, so if I was the short-term lending guy, it’s quite interesting. Obviously, there’d be High Street lenders pulling back and tightening their criteria. Obviously, that does leave a gap. It seems, as you say, the bridging lenders are moving into that gap. I suppose because the rates are higher and because it’s short-term, the risk is slightly less to the lenders as well, not just the borrowers.
Daniel O.: 05:04 Yes, and I think that’s one of the misconceptions sometimes about bridging or short-term finance is, it’s a light touch. That’s just not the case. It’s exactly the same as you would go through for a normal mortgage. They do all of that, but it’s just their processes, what they look for is just slightly different to allow that to go through quicker.
Paul Mahoney: 05:25 There’s just a focus on it being quick, isn’t that, because that’s the offering?
Daniel O.: 05:29 It is that nimble approach. You could have a scenario where you can speak to a client in the morning. You can have the offer letter out. You can have the legals instructed on the same day. Now, I’m not sure many High Street Banks are able to offer that to the clients, so that’s where they’ll play a premium, but as it has grown, more people have come into the market. There’s more competition, so one thing that has happened over the last five to ten years is the average cost of the facility has dropped. There’s many, many people in the market now. Your 10 major providers will do 75% of the market, but you will see in the financial press on a regular appearance another bridging lender that’s coming into the market because there is just that appetite for it.
Paul Mahoney: 06:15 Approximately what is the cost? I’m assuming there’s a range depending on the project and the opportunity, but approximately, what can somebody expect to pay for bridging finance?
Daniel O.: 06:27 Well, it’s all around risk. The first part of it, if it’s a residential property, it’s going to be much lower. If you’re either doing a residential regulated bridge or if you’re even just doing like a buy-to-let type bridge where you’re getting a regular two up, two down, or a three-bedroom semi, you would look to pay the lower end of the market. So, you’ve seen rates from 0.49 all the way up to maybe 0.85. That’s a rough gauge of that.
Daniel O.: 06:55 Commercial will probably start around 0.75 all the way upto depending on the asset class and where it is in the UK. Maybe one, 1.25. Then you have development finance that can start anywhere from 0.85, which I’ve seen in the market, all the way up to 1.5. Once again, depends on the risk, depends on the client, and depends on the exit strategy. The big thing with bridging is, the most bridging lenders will look what is the exit strategy. They’re happy to lend the money and secure it as any other financial loan would be done, but they’re really looking on the exit strategy. How are they going to be repaid?
Paul Mahoney: 07:31 A lot of those rates are per month certainly?
Daniel O.: 07:33 Yes, they are. You’d normally get it in a way as that some bridging lenders will ask for interest to be paid each month, some will roll it up at the end, and some might adopt it from the original advance keyed back on account.
Paul Mahoney: 07:46 There’s various different way in which you can be paid for or the cost can be accrued?
Daniel O.: 07:50 Yes.
Paul Mahoney: 07:50 Okay, that makes sense. What criteria does a lender look at to determine what that risk is and whether the lender is a viable? So, where the borrower is worth lending to?
Daniel O.: 08:02 In most cases it’s what I’ve covered before, previously. They look at the asset itself. If you look at a residential, then there’s less risk because there’s a bigger market for it. So, if the worst were to happen they’re able then to dispose of that either through an auction or through a state agency [inaudible 00:08:20]. So, they normally look slightly cheaper rates on that one, and they find it much easier to underwrite because there are a lot more comparables, but they will also look at the individual themselves. Their capability and their character to make those payments or make the exit in the end. If it’s something like-
Paul Mahoney: 08:38 Things like experience?
Daniel O.: 08:38 … Yes.
Paul Mahoney: 08:39 [crosstalk 00:08:39] if they’ve done it before. Does that come into account?
Daniel O.: 08:41 That really does come into the accounts because if it’s something like development loan, most lenders will be looking at their ability to actually physically do what they say they’re going to do. For instance, if they’ve done a conversion before and then they want to build 10 properties, it is a massive difference in what they’re looking to do. So, it could be a little bit more weary. You’ll do the normal checks as any lender would do, lending anybody money. It’s, you know your customer, you would do maybe a credit check on them. It’s that type of stuff.
Daniel O.: 09:11 It’s very, very simple for a bridging lender to say, “That is the asset,” and then they normally lend against loan-to-value. The LTV or loan-to-value there is normally relatively conservative. You’ll see something like a residential probably going up to maybe 75% loan- to-value, but you probably averagely maybe 50%, 60%.
Paul Mahoney: 09:34 So, generally you want the borrower to have a fair bit of skin in the game?
Daniel O.: 09:37 Yes, very much so. You need once between 20%, 30% on a residential, maybe slightly more on a commercial property. Then when they got their investments and it’s that likely the things going wrong are very unlikely.
Paul Mahoney: 09:51 Of course, yes. [inaudible 00:09:53] going to want to work on that.
Daniel O.: 09:55 Of course, they are. Normally we do, especially residential. It’s very difficult to get things wrong if you buy a good price to start off with, you add value to and then you put it back in the market. Different regions have slightly different issues, but in the whole, you’d normally can buy goods and starts and get a good rates, you should have no problems.
Paul Mahoney: 10:15 Well, that’s all we’ve got time for now, but join us after the break for more discussions on wealth creation including property. Welcome back to Proper Wealth with me, Paul Mahoney. Joining me today is Daniel Owen-Parr from Together and we’re talking about bridging finance. So, Daniel, before the break, we spoke about bridging finance, what it was, the evolution of the product and the offering, why people are using it, and some of the benefits to that as well as the costs. I think we’ve covered that relatively well for anybody who wasn’t fully familiar with the offering, which is great. What I’d like to talk about now is some examples or some case studies on where people have used it for various different reasons. I suppose what they’ve got from that.
Paul Mahoney: 11:06 So, could we possibly start talking about, you mentioned the residential property option is one option, can you give me an example of where someone has used it for that purpose?
Daniel O.: 11:17 So, bridging is a very flexible way of finance. One of the ways that people use it is in the auction market, for instance. In the auction market, you normally have 28 days to complete, and it’s imperative is completed in that short period of time. A standard mortgage can be quite difficult to achieve within that period of time. The vast majority of property that sold in there is residential property, so it’s your very standard two up, two down, or your three-bedroom semis, something along those lines. Where we get a lot of people contacting us is around that speed there. They’ll come to us and they’ll say, “Before an auction, can you give me a decision in principle?” A client can go to the auction with real confidence to understand-
Paul Mahoney: 12:00 That decision in principle, that is just for an amount I assume or is that actually specific to a property they’re planning to bid on?
Daniel O.: 12:07 This is normally the property they bid on. They will come to us and say, for instance, they’ll give us an auction name. There’s probably over 300 auctions in this country that sell property, any stage. They’ll come and say, “Lot number 17,” for instance, and then it’ll have a guide price on there. That guide price is what the auctioneer puts on to say, “This is where we expect it minimum to go for that.” We would always say to the client, “What are you willing to pay for it,” because normally either we paying more on the guide price.
Daniel O.: 12:38 They comes to us, and say, “I’m willing to pay 150,000 on that one there.” We would, then underwrite something on the back of that to say, “We’ll do our own checks.” We’ll be happy to say, “Yes, we would lend against that for you.” That could be done in a matter of 10 minutes. We’ll do a very brief credit check on somebody and then they’ll be all sorted. They can go to the auction with confidence, they can bid up to 150,000, if it goes higher than that, then we will still may be able to support them but they would come back and if they want to carry on with that we may not be able to go up to the full amount they were looking for, but we’ve comfortably do 70% of what they’re willing to pay for it.
Paul Mahoney: 13:14 They go the auction with a bit of confidence as to what they can bid and knowing that there’s a very good chance they’ll be able to get finance within the time frame they need?
Daniel O.: 13:22 Yes. That’s really, really important because after the 28 days, they’re normally given around 10 days grace, but they could be charged interest and after that 10 days they can be sued for deficit of sale. So, basically, if they put it back into the next auction and they’ve sold it for 150 but only goes for 120, the client can be sued for the 30,000 differences.
Paul Mahoney: 13:44 [crosstalk 00:13:44] a deposit. It’s actually what it’s … if it were to sell for less.
Daniel O.: 13:48 Yes. It is imperative-
Paul Mahoney: 13:50 What if it sells for more?
Daniel O.: 13:52 Not have that to very often, but I doubt it would happen in that case. We get people in the day, so, we could attend an auction and they’ll have somebody in the auction room there that would be able to give them that decision and principle or after the fact where you will have somebody that is paying slightly more for it or they believe they’re going to get finance from an institution that then falls through, you would have people then looking at, “Can I get.” and that’s where bridging lending will come into there.
Paul Mahoney: 14:22 I suppose with auctions, often there’s something wrong with the properties in there. That’s quite often why it goes through an auction in the first place, is that fair to say?
Daniel O.: 14:30 It can be one of the reasons. There’s a number of reasons to go to auction. It could be that it could be disposed off by another financial institution. Where somebody is not kept their mortgage payments, they went and deposit that property and get rid of it. That could be one reason why. It could be somebody who’s gone through the normal states agent rooms, and not been able to secure a property and need to move relatively quickly. So, a scenario could be moving abroad. They’ll put it into an auction pretty much knowing that they’re going to get a sale in most cases on that. There’s a number of different reasons why, but yes, they could be in there.
Paul Mahoney: 15:03 I suppose my point there, so far as there being something wrong with the property, that might mean that traditional finance might not be viable at all, is that fair to say? They may not be able to get [inaudible 00:15:13] mortgage because, for example, it doesn’t have the kitchen.
Daniel O.: 15:15 Yes, kitchen and bathroom is one of the main reasons why a High Street lender wouldn’t lend on that. Where for any property developer or investor, however sophisticated they are, to put a kitchen and bathroom is relatively cheap in there. So, we’re quite happy to lend on that.
Paul Mahoney: 15:31 The bridging would allow them to get the property, it would give them the time to fit the kitchen and then they could exit using a traditional [inaudible 00:15:37] mortgage, for example?
Daniel O.: 15:38 It could be simple as painting a property or it could be adding an extension on, changing the roof, doing a number of different things. It could even be getting rid of Japanese knotweed. It could be anything along those lines. Bridging finance would allow somebody to get that property, they can do whatever they need to do however small or large, and then they can move out onto a standard facility.
Paul Mahoney: 15:58 So, for example, they buy a property at auction that doesn’t have a kitchen, the example we use, and they get it for 20% below market value. The bridging might cost them 10%, let’s say, they’ve made 10%, obviously. They get the property if they’ve got the speed of getting it and they’ve actually made some money as well. So, it’s obviously beneficial.
Daniel O.: 16:17 Very beneficial. That’s one of the main reasons why we can we come across people, is that speed.
Paul Mahoney: 16:24 That’s to actually go to an auction and buy a property. Is there any other uses for bridging or what are the other main uses?
Daniel O.: 16:32 One of them could be for business for actually getting some capital quickly. We’ll come across scenarios where individuals may have their own property or they may have a commercial premise they trade outside, and they’re really looking for that speed. They may approach their bank and it could take them three months to get that money and a lot of cases, in business, it’s all about the opportunity to get things quickly. So, they may turn to bridging to tell them and say, “I’ll use the equity in my own home, or the equity in my commercial property,” and I’m able then to take advantage of that opportunity.
Daniel O.: 17:06 It could be something as simple as buying from abroad and having a contract to sell into the UK distributor, for instance, or one of the supermarket but they just need that capital very, very quickly. It could be maybe exiting a partner from a business and being able to pay them off quickly, or it could just be expansion, buying more raw materials from whatever industries.
Paul Mahoney: 17:28 That makes sense because even though the rates with bridging might be higher than with residential mortgages, for example, I assume they’re probably not all that dissimilar to business lending rates. Probably they’re about the same. So, if that’s an easier way of them getting the money and a quicker way of them getting the money, that probably makes sense.
Daniel O.: 17:48 It is about the speed. That’s the main thing in that market, is really about the speed, taking advantage of opportunities, but also in looking the opportunity in their own maybe their residential property, they may have quite a large residential property of their own with a very small mortgage on it and they’re able to then use that money to reinvest back into the business. We do see that quite often.
Paul Mahoney: 18:08 I suppose the exit there would be cash flow of the business generally.
Daniel O.: 18:12 Yes, very much so. Normally would see a contract in place or you’d see some accountants would give you a projection of how the business is going to repay that, once again, these facilities they normally only last for 12, 24 months at the very most.
Paul Mahoney: 18:27 From a lender’s perspective and looking at that type of bridging, it’s very similar to the residential side in that they’re looking at the property and the financial position of the borrower, or does the actual business come into play as well, so far as whether the business is profitable?
Daniel O.: 18:42 Most important, obviously, is the property. You’re looking at our loan-to-value to keep that within comfortable parameters. The next part of it is the individual, and their capability to pay back. That’s normally shown through business performance, past, present and future. So, projections, Normally, a bridging lender would get in touch with the accounts or accounts would provide a reference to show that. So, normally, you’d see a set of accounts and then commentary from an accounts and just to confirm that they do have that capability to make those payments.
Paul Mahoney: 19:14 That makes sense. Great. We’ve covered two very different uses of funds there with bridging. Is there anything else with regards to what’s changing or where the market is going, I suppose, is what we haven’t covered here. Where do you see the future of bridging going?
Daniel O.: 19:31 I’d say bridging is growing. If you look back 2013, you probably do as an industry probably 3 billion, this year, maybe up to around 6 billion, 2020 you can see 8 billion. So, it’s growing industry. Unlike any industry at the moment in time, digital innovation is coming into the market. So you see peer-to-peer lenders, you see traditional lenders going down more digital approach where people can get decision on principles online within 10 minutes. They can sit at home eight o’clock at nights and they can get a decision in principle rather than waiting for the traditional business hours between nine to five. So, the progression of that further and further down the line and then every part of the process they can add digital opportunities in there. With solicitors and conveyancing, that’s one way to speed that up. It’s all client driven about that speed and that decision making process.
Paul Mahoney: 20:30 So, different types of lenders entering the market, tech becoming a big part of it, and the offering to the client making it easier for them to do things that are usually a bit painful.
Daniel O.: 20:39 Yes.
Paul Mahoney: 20:40 Okay. Great. Well, thanks very much for your time, Daniel. That’s all we’ve got time for now. Thanks for watching, but Join us next time for more information on wealth creation including property.