A bridging loan is a trusted form of finance relied on by property developers and investors as it offers short-term finance to get building projects off the ground and sale ready.
However, delays in construction caused by the pandemic, and investors re-evaluating what they do with their assets has meant that deciding when to switch to longer-term finance solutions is often less clear. This is further complicated by the current speculation that the Bank of England will need to start raising interest rates shortly.
If market conditions have got tougher since the start of your development, it’s not always easy to sell multiple homes at the right price quickly when the term of your bridging loan expires. Equally, if the market is rising, you may want to hold onto some of the units for a little longer.
That’s why we offer our clients a bridge-to-term option.
What is a bridge-to-term loan?
A bridge-to-term loan is a solution which initially serves as a bridge. The developer takes out a short-term bridging loan (which is usually available for up to nine months) to purchase the property and/or complete their construction project, in the knowledge that a switch to a term mortgage at the end of the bridging period has already been guaranteed. Once the project is completed, the bridging loan will switch to the pre-agreed buy-to-let term mortgage, with interest-only payments each month for a term of up to 10 years.
Castle Trust Bank will consider foreign nationals, ex-pats and first-time landlords. We will also use holiday let income instead of assured short hold tenancy income to assess affordability on holiday let properties.
How to use this kind of finance
Bridge-to-term loans are designed to give investors a guaranteed exit strategy from the bridge on a residential project.
Typical exit strategies can include the sale of the development, or a remortgage through a new application so the properties can be rented out. Either option, however, is subject to levels of uncertainty so a bridge-to-term loan can provide a guaranteed exit strategy right at the beginning of the process – and with Castle Trust Bank, this can be achieved through a single application form.
A bridge-to-term loan can give investors the flexibility to gain income from the site while it is being rented out or sell the development for its full market value once this has been realised post-completion.
With this kind of finance, developers can take their time with an asset to evaluate options and wait for the most favourable market conditions. It gives them the opportunity to assess how many units they want to sell, rent out or hold in the short term while they gauge the market and calculate potential gains.
Repayments and rates
Our bridging rates are set to 0.67% per month, with a maximum loan to value (LTV) of 80% of the gross day one value. Term rates start at 3.82%, with a maximum LTV of 75% of the net value – with up to £15m available on term loans.
One thing that property investors may be nervous about is the risk that term rates will have increased by the time their bridging loan finishes, and are looking for longer-term finance. Currently, there is speculation that the Bank of England will need to increase rates above its long-term, historic low of 0.10%.
Speaking to the Commons Treasury shortly after the November base rate decision, Bank of England governor Andrew Bailey said he was “very uneasy about the inflation situation” as it rose to 4.2%, more than double the central bank’s 2% target. This has put fresh pressure on the bank to increase the base rate at its next meeting on 16 December.
Bridge-to-term loans can help with this uncertainty; the rate for the term portion of the loan is agreed as part of the original application and is carried forward to when the term product is activated, providing borrowers with certainty around the cost of their future loan. To add even greater certainty, the initial interest rate on the term loan can be fixed for either two or five years.
Rise in use of bridging loans
Changes to permitted development rules earlier this year enabled a wider scope of commercial properties to be converted for residential use and shifts in property buying behaviour over the course of the pandemic have driven up the use of bridging.
Over the last 18 months, property investors have converted retail space into residential accommodation or mixed-use sites as well as renovated properties to rent out in the holiday let market.
According to the Association of Short-Term Lenders, bridging completions rose by nearly a quarter in Q2 and 136% on the previous year.
With bridging loans in such high demand, we want to give our clients peace of mind that the exit route is guaranteed.
Case study
One example of the use of a bridge to term is a recent case completed by Castle Trust Bank where we issued a £4.5m bridging loan 14 working days after the initial terms had been issued.
We worked with broker firm Sirius Property Finance to refinance an existing development, including mezzanine finance, on a permitted development scheme of 25 flats in Reading.
The case had a complex nature as it was secured on a first charge over a head lease in a company name.
Terms for the case were issued on 29 September, with the application completed and documents submitted within 24 hours. The case was underwritten, offered and solicitors instructed within three days.
The case eventually completed on 19 October.
Barry Searle, Managing Director of Property at Castle Trust Bank, said the case was a “great example of what can be achieved when all parties work collaboratively to get a case across the line”.
Nicholas Christofi, managing director of Sirius Property Finance, said he was pleased with how Castle Trust Bank were able to turn the case around and meet the client’s requirements.
“It was a tricky case with a tight deadline, and we pulled together to make it work,” Christofi added.
Overall, bridge-to-term loans offer the certainty of an exit strategy to investors without the usual hassle that comes with refinancing. Thus, investors have the capacity to adjust their business plans depending on changing market conditions and make confident, informed decisions on what to do with their assets.