Bridging loans are short term, high interest loans that can be a useful resource to access funds quickly, at a price. Usually the main priority for our clients seeking to take out bridging loans is to drawdown funds quickly. In this blog we aim to share a few tips with borrowers who are considering bridging finance on how to achieve a smoother, quicker and easier refinance. Refinancing will never be stress free, but it can certainly be less stressful if you keep in mind these tips.
Tip 1. Understand the cost of borrowing
It sounds simple, but it is important to be clear on what the full amount of the loan is, and what portion of the amount borrowed relates to fees and interest. The amount of money advanced to you will usually account for such costs and often a lender will retain these sums at the outset. The full amount (including amounts retained by the lender when the loan is advanced) will then all be repayable, on the terms of the agreement.
As mentioned above, short term bridging loans usually involve a high rate of interest and fees because the money is often needed quickly, but it is important to understand just how high those sums are. Fees payable by you will often include the following:
An arrangement fee/facility fee: this is the lender’s fee for making the loan;
Prepayment or exit fee: a lender may require a fee to be paid on early repayment or exit of the loan;
Valuation fee: for any loan that is secured over property, the lender will want to ensure the value of the property is sufficient to cover the loan amount, and a valuer will be instructed to assess this;
Your legal fees: the lender will usually insist that you obtain independent legal advice from a solicitor before they will advance the loan to you, so they can be sure that you understand the terms of the loan. You will have to fund these legal fees separately so you should ensure you have funds available to cover these;
Lender’s legal fees and disbursements: as well as being responsible for your own legal fees, the lender will also usually expect you to pay their fees as well. This amount may be expressed as an estimate so be aware that the final figure could be higher;
Broker fee: if a broker has assisted in procuring the loan, their fees will usually also be payable by you; and
Bank transfer fees: often a relatively small amount added to cover any bank fees for transferring the money.
This is not an exhaustive list, and further fees could apply, but the important point is to be completely clear on what they are, and how they will be funded.
Tip 2. What security is being given
One of the main conditions of the loan is likely to be that you provide certain security to the lender, most often in the form of a charge over your property, although security may be provided in a variety of different ways.
It is important to understand that, whatever the security is being granted over, the ultimate risk is that, if you breach a term of the loan (such as if you fail to make a payment when due), the lender will usually be able to commence court proceedings for possession. It is therefore extremely important that you are sure you can comply with the terms of the loan before you commit because if security is granted over your home, the lender may ultimately take possession of it and sell it to recover what is owed, leaving you (and anyone else living in the property) out in the cold.
Tip 3. Lender’s pre-loan requirements – be prepared to get ahead of the game
Lenders have their own standard list of pre-loan enquiries. Your solicitor will work through these enquires with you so that each one is dealt with to the lender’s satisfaction. However, it is common for lenders to require the following and you can get ahead of the game by dealing with these at the start of the transaction:
Contact your insurer to note the lender’s interest on the property’s building insurance policy and ensure the insurance covers the reinstatement value confirmed in the lender’s valuation.
Prepare and supply certified copies of each borrower’s passport, or photo driving licence and two recent proofs of address to your solicitor.
As set out above, you are likely to be responsible for the lender’s legal fees as well as your own. The lender’s lawyers will not carry out any work until your lawyer provides an undertaking for those fees. To give an undertaking, your lawyer will require funds on account: arrange to transfer funds quickly to avoid delay.
You or your broker need to provide an explanation of how you intend to repay the full loan amount at the end of the term and check that you will have sufficient funds to do this. Think about this early on.
Tip 4. Timing, timing, timing. The process may take longer than you think – contact your solicitor early
It is important to contact your legal team early. Some aspects of refinancing can take time. For example:
Commonly, lenders require you to obtain legal advice on the nature and conditions of the mortgage offer and the legal implications of the loan before completion. Your solicitor will need to review and advise on the full suite of security documents, including the mortgage offer, mortgage deed and general terms, and will usually be required to sign a Solicitor’s Certificate to evidence this. You will either need to meet with your solicitor in person or take the advice over the telephone so that the Solicitor’s Certificate can be signed.
If a lender requires searches (and will not accept no-search indemnity insurance) it is essential to contact your legal team quickly. Searches need to be submitted as soon as possible as it can take time for search results to be returned. Searches may reveal that the property is not suitable for your needs or that there are issues that could impact on the value and so deter the lender. Examples are potential ground instability or a mains pipe running underneath the property that could hinder development. Lenders do sometimes accept no-search indemnity insurance as an alternative to carrying out property searches. This means that the policy covers the lender against the loss in value of the property (up to the limit of the indemnity) if an adverse issue is discovered after the no-search indemnity policy has been put on risk that would have been identified through searches. Often no-search indemnity insurance only protects the lender against adverse issues affecting the property and so this is not ideal for a borrower who gets no benefit from the policy. Not every lender will accept no-search indemnity insurance, but it can be a useful option if time is not on your side.
it is common for the lender’s lawyers to raise further enquiries about the property to ensure they have carried out sufficient due diligence to protect the lender. Further enquiries may be raised on the title, planning documents, searches, etc. Time is needed to investigate, resolve legal issues and provide satisfactory replies. Keep copies of all documents relating to the property whilst in your ownership. This makes it easier and quicker to provide information if requested by the lender.
Reporting to the lender
The lender’s lawyer needs to report to the lender before the lender will release the funds. The speed at which the lender’s lawyer reports is an element of the transaction that is outside of your and your solicitor’s control.
Tip 5. Understand your obligations
It is often a condition of the loan that it is used for a specific purpose such as to repay an existing lender. You will be in breach of the loan agreement if you do not use the funds for the specified purpose, which could trigger an ‘Event of Default’ and result in the lender seeking immediate repayment. You should therefore ensure that your plans for the money match what is in the loan agreement.
There are likely to be restrictions on how you can deal with the property once the loan and security documentation has been entered into and you should check that these do not conflict with your plans for the property, or you could be in breach of the loan terms. Commonly for example, you will need lender consent before you can:
make alterations or extensions to the property;
dispose of the property
rent out the property; and/or
create any other mortgages over the property.
The loan will be be secured by a legal charge which is registered at the Land Registry (and at Companies House if the borrower is a UK company or limited liability partnership), which flags the existence of the security to third parties.
You are also likely to be under an obligation to ensure that adequate buildings insurance is in place over the property and to keep the property in good repair at all times, so make sure that these additional obligations are understood and can be complied with.
Tip 6. Does anyone else need to take advice?
If the bridging loan is being advanced to a single individual, and secured over a jointly owned property, the lender will usually insist that any joint owner (and potentially anyone else who has an interest in the property) also receives independent legal advice, so that they understand the implications and risks associated with the lender taking a charge over the property. Again, the lender will want to see a certificate signed by a solicitor confirming the advice has been given and understood, and the legal fees for this will need to be funded by you.
If you need any advice on bridging loans or other types of financing or refinancing, Kingsley Napley can help. We have a dedicated client focussed team, drawing together specialists from real estate, banking and construction. As experts in this field we are used to helping our clients to achieve their target deadlines by working together closely throughout this process.