Jonathan Samuels, CEO of specialist lender, Octane Capital, believes that the growing prominence of longer-term bridging finance reflects an increasingly complex property market, where slower transactions, project delays and less predictable exit strategies mean borrowers require greater flexibility when structuring short-term finance.
Traditionally, bridging loans have tended to run for between six and 12 months, however, longer terms of between 18 and 24 months are becoming increasingly common as lenders adapt to changing market conditions and the need for more realistic exit timelines.
Octane Capital analysed the potential cost of this shift based on the current average property value, bridging loan-to-value and monthly bridging rate, comparing a traditional average term of nine months with a longer-term facility of 21 months on average.
Based on an average property value of £277,542 and an average bridging LTV of 52%, a borrower would require an estimated £144,322 in bridging finance.
At an average monthly bridging rate of 0.82%, the monthly interest cost on this loan would stand at approximately £1,183.
Over a traditional nine-month bridging term, this equates to an estimated £10,651 in interest. However, over a 21-month term, the total interest cost increases to £24,852, a difference of £14,201.
Whilst the additional cost of a longer facility is substantial, the extra 12 months can provide borrowers with valuable breathing space when executing an exit strategy, particularly in a market where property transactions and development timelines are becoming increasingly difficult to predict.
For example, Octane Capital's recent analysis of England's new-build market found that one in eight new-build homes currently for sale have been listed for more than six months, demonstrating the length of time that can be required to secure a suitable buyer.
Planning, refurbishment and other project delays can also extend borrowing requirements, making it increasingly important to select a realistic term from the outset.
Whilst a longer facility can increase borrowing costs, opting for too short a term can create refinancing or re-bridging pressures if an exit is delayed, so borrowers should consider the overall flexibility and cost of a facility, including potential fees. This is particularly relevant where a longer term is chosen for added breathing space, with lenders such as Octane Capital charging no exit fees should borrowers successfully exit earlier than anticipated.
Jonathan Samuels, CEO of Octane Capital, commented:
“Bridging has always been about speed and flexibility, but flexibility increasingly means giving borrowers sufficient time to execute their exit strategy as well as getting the initial funding in place quickly.
Property transactions don't always follow the timeline you expect. Sales can take longer, planning can be delayed and refurbishment projects can encounter unforeseen issues, so building a realistic timeframe into a bridging facility from day one is extremely important.
Of course, additional time comes at a cost and our analysis demonstrates just how much more interest can accumulate over a longer term. That doesn't mean borrowers should automatically opt for the shortest facility possible, but nor should they simply take the longest term available.
The key is working with your broker and lender to establish a realistic exit strategy and assessing the total cost and flexibility of the facility rather than focusing solely on the headline rate.
It's also important to compare lenders carefully. Features such as having no exit fee can provide borrowers with the breathing space of a longer facility whilst still allowing them to exit early without an additional charge should their plans progress faster than expected.”
