PRICIPLES OF GOOD LENDING-BRIDGE OVER LOANS
Abridging loan is an advance given to a borrower for the purpose of completing a particular purchase with the source of repayment coming from the sale of another property in the near future.
There are two types of bringing loan facilities:
- i) Open ended bridge loan
- ii) Closed ended bridge loan
- Closed Ended Bridge Loan
This means that the borrower has already identified buyer a buyer for the existing property which is the main source of repayment of the advance. Its one where contracts have been exchanged with a clear completion date on the sale of an existing property which represents the key source of repayment. Since such contracts are legally binding the lending risks are lower now provided a lawyers oath / undertaking is obtained to ensure sale proceeds are received the bank. Exchange of contracts does not however guarantee that a sale will take place and problems can still arise in the full circumstances.
- i) The buyer may not have the finance to complete the purchase. However, are put able lawyer cannot allow contacts to be exchanged if the necessary resources to complete the contract are not available but it can happen. Close liaison with the lawyer / advocate is essential indirectly through buyer’s lawyers. It’s also becoming common for buyer to deposit 10% of the value of property to be purchased as a show of commitment to purchase the property.
- ii) Completion of the contract maybe conditional. For example the buyer might have an option to withdraw from a purchase of property being built / improved if works are not finished on time. Alternatively completion maybe dependent the buyer having a mortgage.
iii) Although fixtures and fittings maybe forming a significant part of the purchase price, they may not form part of lenders security if things go wrong. A full valuation of the property should be taken and if significant be included as part of security. However such valuation is not always taken in a bridging situation particularly if bridging appears to be closed.
- iv) Collision between buyer and seller, they might mutually agree not to go ahead with the transaction in such a situation there is nothing a lender can do to ensure the transaction go ahead in such circumstances and care should be taken when its known that the buyer and seller are related.
- v) Fees and finance costs.
NB: The safest course of action when in doubt completion will take place is to treat the facility as an open ended bridge loan.
This occurs especially where contacts regarding the sale of an existing property which represent source of repayment have not been signed for the loan to be advanced to purchase a new property. A lender should not consider an open ended bridge loan unless:-
- i) The property market in question is a buoyant and it looks like staying that way in immediate future.
- ii) An early sale of the existing property is in prospect i.e. a definite buyer has been found although contact have not been signed.
iii) There is a substantial margin to cover all contingencies. The expected net sale proceed should be able to pay the loan plus twelve month accrued interest and at the same time allow for 20% reduction in the asking price.
- i) The advance for property purchase must be made on a loan account in order for any tax benefits to be claimed.
- ii) Where the deposits only is being advanced its still necessary to access the complete transaction incase problems arise.
iii) Written confirmation must be obtained from the borrower’s lawyer that contract for both sale and purchase have been obtained.
- iv) Lawyer undertaking or oath should be obtained in respects of monies due or deeds to come. Consideration to be given to take formal charges over the property especially if the bridge is open ended.
- v) Where the source of repayment is a mortgage from another lender confirmation are required of the amount and when it’s due together with an undertaking to send money to the bank. If part of borrower’s contribution is to come from other sources similar considerations may apply.
- vi) If the loan is being provided to be to build properly ensure:-
- a) Builders are reliable
- b) The contract is either fixed price or reasonable terms.
- c) Advances are only made against architect’s certificates at pre-determined stages of development.
vii) Realistic valuation should place in property
viii) Full insurance cover is essential as soon as contracts are exchanged.
ix) Status enquiry is necessary for lawyers unknown to the bank.