"We live in interesting times. While I’m not gloomy about the future, the outlook is certainly uncertain, both from a political and economic perspective."
This uncertainty is yet to translate to the property market in any meaningful way. Rightmove says the average asking price of property coming to market hit its sixth consecutive record of £369,968 in June and has revised its full-year 2022 house price forecast up from 5% growth to 7%.
The vast majority of bridging lenders continue to display a healthy appetite for new business and pricing is still competitive, despite the rising interest rate environment we are currently faced with. At London Credit, we haven’t seen a drop-off in applications and there has been no drop-off in quality either.
However, in an uncertain environment, the exit strategy for a bridging application becomes even more crucial.
Generally, an exit strategy would typically consist of one of the following: (i) selling the property or other assets or (ii) refinancing onto a longer-term product, such as a buy-to-let mortgage. Normally, if a planned exit doesn’t come off, the borrower can ask their bridging lender if they can extend the existing loan. However, if the client is close to their maximum loan to value, they may not be able to carry on rolling up the interest. Alternatively, the lender may charge a higher rate or refuse to extend. Then the borrower will have to approach other lenders, with no guarantee of success. They may charge more – and will still require a clearly defined and valid exit strategy.
"In an uncertain environment, the exit strategy for a bridging application becomes even more crucial."
In an uncertain environment, you can’t be sure that an appropriate exit strategy today would also be suitable in the future. Property prices may fall, transactions may dry up, securing a mortgage may be more difficult. These all mean that a bridging loan borrower may well find that their planned exit strategy of selling the property will take longer than initially projected.
Brokers need to be aware that their customers may not reach their desired exit route in their designated time frame. While it is still vital that borrowers have a clear exit strategy for their bridging loan application, it is advisable that they go further and create a plan B (and even a plan C). Lenders want to see that borrowers are aware of market realities and have clearly planned ahead with regards to their exit options. Clients are more likely to get the application through if they can demonstrate that they are aware of market conditions and have made contingencies.
So, what might this look like? If the original exit strategy is sale of a property, has the client considered the rental potential if they were unable to secure a sale at the right price? If so, a plan B could mean that the borrower would refinance onto a term loan while they let out the property.
A plan C, for example, could be for a bridging refinance deal to provide some breathing space and allow more time to market the property. Of course, this is not the optimal option, and all parties will hope that plan C isn’t necessary, but it is important to have considered contingency options.
Alternatively, the borrower could inject funds into the loan so as to decrease the outstanding balance owed to the lender and subsequently the LTV, thus ‘allowing’ for a short-term extension of the facility on a rolled-up interest basis. Similarly, the borrower could provide additional security as collateral which would again decrease the LTV. These are short term, ‘buying some time’ options, while the client works in parallel so as to arrange the formal exit from the facility without problems.
The economy and property market are both getting tougher, but it’s not a time to panic. Lenders are still looking to lend, and property market fundamentals are still strong. Brokers need to ensure that borrowers are aware of market realities, are proactive in their actions and thus can deal with possible delays. There are options and ways for borrowers to manoeuvre through any hurdles and lenders will accommodate their requests so long as they demonstrate that they know what they are doing.
Plan carefully and projects can still be successful and profitable for all concerned.