Bridging Loan Guide

We have produced the ultimate guide to bridging loans and property development finance in Northern Ireland.

We understand that bridging finance can appear complex and we are also fully aware that many lenders on the mainland will not consider lending in Northern Ireland, so combining the two together makes for a very interesting and difficult proposition. But not impossible.

We are now in a position to fund bridging loans in Northern Ireland with a select band of introducers/brokers and this guide to bridging loan finance in the province, should help to answer any questions you may have.

So, without further ado, here is the ultimate guide to short term lending in Northern Ireland.

Where do we lend | The Finance Business
We lend in Belfast and all of the 6 counties.

Whilst most financial service providers, particularly in lending, restrict their lending activities to Belfast only, we won’t.

We will lend in Co.Armagh, Co.Fermanagh, Co.Tyrone, Co.Down, Co.Antrim and Co.Londonderry. Our view is that borrowers in all of these counties will need finance at some point, be it secured (like a bridging loan) or unsecured (like a personal loan) and we want to be in a position to be able to service the secured loans.

We had a recent deal where we lent to a farmer in Carrickfergus who had decided to branch out of farming and buy two investment properties, one in Belfast and one in Bangor.

We provided a total lending facility of £625,000 to purchase and refurb both properties. We arranged a 12 month bridging loan facility, 58% LTV, the interest rolled up for the 12 months and no exit fee. Needless to say the borrower was delighted and we are absolutely certain he will be back to us for his next project.

The location does not concern us. It can be anywhere in the province and as long as the financials work for us, we will consider lending.

Open Bridging Loan | The Finance Business
Open bridge – where no firm exit is in place.

This is the most common form of bridging finance because the bridging loan is taken with knowledge of what the exit is likely to be but with no firm end date of when that will be.

For example…You apply for a bridging loan to purchase a property and your exit strategy will be to sell that property after you have completed a light refurbishment. However, like any house sale, you never know exactly when that will be, that is a classic example of an open bridging loan.

Or, you buy a property with the intention of doing it up and then renting the whole property out (or rooms if it is a HMO) and refinancing the bridging loan to a long term lender, like a high street bank.

This takes time and what you won’t be able to do is give the bridging loan lender an exact date of when that will happen. That is a classic open bridge and one that 90% of bridging loans are about.

Closed Bridging Loan | The Finance Business
Closed bridge – where you know exactly how it will be repaid and when.

Not as common as an open bridge but the the type of bridging finance that most lenders would prefer to fund as they know that their loan will be repaid and when that will be.

Our guess is that lending in Northern Ireland will be restricted to closed bridges initially, to give certainty of repayment to the bridging lender.

As an example of a closed bridge, a borrower could apply for a short term bridging loan, say for 6 months, on the basis that they may come into an inheritance such as the proceeds of a will or house sale.

The key point is that the borrower borrows the money from the lender but knows that it will only be short term as they know that they will be coming into money at a particular point, which will then be used to repay the loan.

Bridging loan fees | The Finance Business
Bridging loan fees and charges

Most lending is priced on risk. So if a borrower approaches us to buy a residential property for say £200,000 and has a 50% deposit, we are more likely to be able to arrange a monthly interest rate of 1% a month or even lower.

However, that is on mainland UK. In Northern Ireland that approach is unlikely to happen, certainly within the first 12 months of lenders being active.

We fully expect rates to start off in the region of 1.5% a month for residential lending and up to 2% a month for commercial property lending.

Arrangement fees

This should mirror what happens on the mainland. 2% is the norm and we don’t see this changing although like every bridging loan, each deal will be priced accordingly.

Exit fees

Likely to be around the 2% figure although there may be scope to reduce this to 1% on certain deals. A closed bridge is more likely to attract no exit fee.

Upfront fees

None. Any lender or bridging loan provider who tells you to pay an upfront fee should be avoided. There is no guarantee that your loan will complete and pay out and if it doesn’t, you will have lost that money.

The same applies to any provider who asks you to pay a fee for the production of Heads of Terms or Indicative Terms. Lenders produce these without the need for any fees to be paid so you shouldn’t either.

Property Development | The Finance Business
Property development finance and staged payments

Property development finance is a completely different product to a bridging loan, although many people just lump the two together.

It is unknown at this stage whether development finance will be offered in Belfast or Northern Ireland. Our guess is that it will be but only in Belfast initially.

To be fair, even on the mainland, development finance is often restricted to major towns and cities, so there is no real change in lending policy here.

So how does development finance work?

For example, a lender will offer a loan facility of £100k to buy a property valued at £200k in say, Lisburn. The borrower will demolish the existing dwelling and has planning permission in place to build 2 new, 3 bed townhouses.

The construction costs to demolish the property, do the groundworks and build the houses comes to £200k. The GDV (Gross Development Value or final end value) of the property is £600k.

We can fund the £100k they need to buy the property because it is only 50% LTV (Loan to Value). Easy.

We can also fund 100% of the total build costs in staged drawdown payments. So…We can fund the whole £200k in build costs by way of a series of small payments.

This means that when the groundworks are done (for example) and the bill for that comes to £50k, we will arrange for a QS (Quantity Surveyor) to visit the property and assess that the works have been done to standard and we will arrange for £50k to be released to pay the groundworks contractor for their labour and materials.

Payments are released in arrears so that each time a piece of work has been completed, we arrange for funding to be released when the QS is happy with the quality and content of work produced.

Do you always provide 100% of the build costs?

Not always but most of the time. The reason for this is that a lender wants to be absolutely certain that the build will be finished and the only way you can ensure this is by providing all of the funding to do so.

Borrowers | The Finance Business
Borrowers and their responsibilities

Interestingly, bridging lenders are less bothered about a borrowers credit history than residential mortgage lenders but more of that later.

Borrowers can be individuals, sole traders, limited companies, partnerships and LLPs.

As most bridging and development is still offered on an unregulated basis, most lending is done by way of a limited company and usually, an SPV (Special Purpose Vehicle) to avoid flouting rules laid out by the FCA.

Even if borrowing in a limited company name and benefiting from the protection that having limited liability offers, you will still be required to sign a PG (Personal Guarantee) and a Debenture will be taken over the company too.

This applies to both bridging and development finance although for the latter, the lender will also insist on collateral warranties, step in rights and possibly even Latent Defects Insurance. An Architects Certificate is usually acceptable in England, Scotland and Wales but it is likely that this won’t be the case in Northern Ireland.

Anti-Money Laundering Checks

All borrowers will be subject to anti-money laundering checks and it is a criminal offence if the lender did not do this and if is found that they didn’t, they could be fined and stopped from lending altogether.

ID and address history

All borrowers will have to prove their address history for the last 3 years and produce some form of visual ID such as a passport and/or driving licence.

Valuations & Surveys | The Finance Business
Valuations & surveys

A valuation will be instructed in every case. We have yet to finalise our valuers panel for Northern Ireland but we fully expect to have coverage right throughout the 6 counties.

In addition, if we are funding a development, we will also insist on a QS or at the very least, a monitoring surveyor to protect the lenders interests.

Bridging loan solicitors | The Finance Business
The legal process

This is the most important part of the whole process and one that has most bearing on the speed of the deal completing.

The borrowers will be expected to instruct their own solicitor and of course, pay the associated fees with that. They will also be expected to pay the lenders legal fees, so there are significant fees to pay that many borrowers don’t even give any thought to.

Legal Undertaking

This is basically a guarantee from the borrowers that they will pay the solicitors fees and is signed by them. Basically, no legal work will be done on the case until this is signed and many lenders won’t even consider a case is progressing until the legal undertaking has been paid.

Types of Property | The Finance Business
Types of property you can get bridging finance on in Northern Ireland

As well as the typical residential properties that every bridging lender offers on such as residential auction purchases and refurbishments, there are also a number of other property types that lenders may consider.

They are: (we have highlighted how likely that these property types will be offered in Northern Ireland)

  • Retail units (unlikely in NI)
  • Offices (likely)
  • Offices to residential conversions (highly likely)
  • Factories, industrial units and warehouses (unlikely)
  • Farms (unlikely)
  • Bars, restaurants, takeaways, pubs and hotels (unlikely)
  • Nursing homes (unlikely)
  • Student accommodation (highly likely)
  • HMO purchases (highly likely)
  • Car parks (if revenue generating and can be serviced – likely. If not – unlikely)

The rule of thumb, like all lending, is that each case will be considered on it’s own merits and if the numbers add up, there is demand for the type of security/property being offered and there is a verifiable exit, then the proposition will be given due consideration.

Credit Status | The Finance Business
Credit status, credit searches & credit scores

As mentioned earlier, an applicant or borrowers credit status is less important in bridging and development due to the lower LTVs offered by lenders that protect their interests.

Their security is in the asset usually and the borrower, quite often, is secondary to that.

Many lenders now offer true non status loans with no credit checks and no credit scores, so a borrower with an adverse credit history shouldn’t be precluded from applying and obtaining, bridging or development finance.

However, they point here is honesty. Don’t hide anything and certainly don’t try and mislead a lender or they will simply decline your application.

How much can you borrow on a bridging loan | The Finance Business
Is there a limit on how much I can borrow on a bridging loan in Northern Ireland?

The maximum amount is likely to be in the region of £1m per transaction but for the right deals, such as student apartments, we may go higher.

In terms of LTVs, these are likely to be restricted to around 60% for residential and 50/55% for commercial, however our view is that commercial bridging will not offered initially as it does represent a greater risk, as we have seen on the mainland.

Summary

Like all new things, lending in Northern Ireland is going to be a case of finding our feet…finding out which areas and type of properties offer the best rental returns, which areas have the most demand for new housing, which areas have an opportunity for new student housing, etc.

The upshot is that lending in Northern Ireland is going to happen, no question. It’s just a question of ensuring that we assess the risk competently and work with property developers, brokers, accountants and other introducers who we can trust to deliver quality property transactions.

    

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