Getting your exit clear – Re-financing a bridging loan

Refinancing a bridging loan which has been used to build or refurbish a property that is to be retained as a holiday let investment is a question that our customers approach us with on a regular basis. Unfortunately, problems can and do occur when attempting to refinance a bridging/property development loan, with a long term commercial holiday let mortgage.

The circumstances that we come across are varied but are generally the problems are caused by one overarching issue; a failure to discuss, in advance, the holiday let or commercial mortgage that will be used to pay off the bridging loan.

This is known to bridging lenders as the “exit” from their bridge.

Bridging finance is a short-term loan which achieves a specific objective, in this case a development project yielding a completed property.

Short term lenders have no interest is the long-term future of the property or applicant, as they will have their money back in 12-18 months on average. Similarly, the holiday let mortgages lenders have no interest in the build phase. They underwrite on the basis of there being holiday letting income almost immediately, which will be the way that their monthly mortgage payment is met; obviously this can’t happen if it is still being built.

The underwriting for bridging is all based on value; both on day 1 or on the final value (known as gross developed value or GDV). The lender will have limits on how much they will lend against a given value. As work progresses on the site then the value increases and the bridging lender sends out his surveyor out to assess this and then lends the next tranche of money

Personal underwriting, such as credit status, affordability and rental income in the future is largely unimportant to bridging lenders. You must compare this against commercial holiday let loans which are long term mortgages where the lender is always interested in the credit status of the applicant and is reliant on the projections for holiday let rent that are going to support their loan. Moreover, they will want to consider projections versus the affordability if interest rates were to rise. There will be a number of other things that will be important for both lenders, as you would expect from a large-scale conversion or new build. For example, how the project has been supervised and the quality of the provider of the structural warranty.

Below are recent examples of the kind of issues we come across, when approached by customers that have not checked out a long-term mortgage availability. Some of these will not matter to the bridging lender but they will affect a long-term mortgage.

Build and Planning Issues

  • unacceptable structural warranty provider or no structural warranty in place or architects certificate only, for a type of conversion requiring an insured structural warranty
  • non-traditional construction, especially all wood
  • buildings insurance not available without exclusions or loading for flooding
  • property shares gas and electricity supply/meters with any neighbouring title deed, including applicant’s main residence
  • whereas HM Land Registry willing to separate title deed such that project is separate from applicant’s main residence, Planning Permission ties project in perpetuity to main house
  • section 106 restriction, holiday let only, reducing available loan to value, leading to shortfall in bridge repayment.

Rental Projections

  • Requested loan size too large for a commercial holiday let lender to accept projected holiday let rental income only; history of income needed too
  • Holiday Let projected income too low to support loan size required.
  • Projections dependent on leisure facilities provided by a third party
  • Competition from neighbouring properties if the project is on or adjoins a holiday park

Personal Underwriting

  • Level of background customer debt, too high in relation to personal income
  • Adverse credit
  • Buy to let portfolio, failing rental coverage stress test due to size of mortgages

This is not an exclusive list but is just a few examples of the challenges we have faced.

Whereas we do have some innovative ways around some of the issues, good advice is to contact us early, so that we can tie in both sides of the finance transaction together, the bridge and the holiday let mortgage exit.

As a Mortgage Broker that is active in both short term bridging and long term investment mortgage lending, such as holiday let, we are well placed to try and dovetail the two loans together, ensuring that customers are not backed into a corner where a distressed sale is their only option.