Re-bridging often gets a bad press. However re-bridging can be a sensible thing to do in the right circumstances with the right lender.
In an ideal world, every borrower will have a secure exit route and will pay their lender back on time, but as we all know we don’t live in an ideal world.
Sometimes for example a refurbishment, renovation or development can be delayed due to no fault of the borrower. Where a bridging loan has been used for this, it can become impossible for a borrower to repay the funds back on the due date.
It’s not too difficult to imagine, for example, a situation where the borrower has hired a contractor to do some of the work, who subsequently pulls out or ceases trading. It is not always easy to find a replacement who can step in at short notice, brief them fully on what is required, and get started on the task in hand.
Equally, the development or renovation might turn out to be more complex than originally envisaged and involve a significant increase in costs, not covered by the original loan.
In some instances, even where the development itself has been completed, the borrower may not have been able to find a buyer to sell the property onto at the right price. If they have more time to make the sale, they may be able to achieve a higher price, adding additional benefit for the borrower and reducing the Loan to Value.
Where the borrower has kept a lender well informed, many will extend the term for a period to give them the time to complete their project and realise their exit strategy – but some externally-funded lenders have funding restrictions themselves which can mean that it is not possible for them to extend the term.
In these circumstances, a re-bridge for a few weeks or months makes perfect sense. For a pragmatic lender, who has carried out due diligence and can see a clear exit route, it is perfectly sensible to offer a re-bridge.
Other circumstances where a re-bridge is rational can be where something has happened to the previous lender – perhaps they have had their funding pulled, for example – and their borrowers then need to re-bridge their loan rapidly. Or if a borrower is in receipt of staged payments and the lender can no longer provide some of the agreed money, again the developer will be forced to re-bridge.
When it is not sensible to re-bridge an existing bridging loan is when the borrower is just going from lender to lender with no clear exit route. Each time they take out another loan they will incur more fees and more interest and so the equity, and LTV, in any property will increasingly be eroded, possibly to the point where even possession and sale of the property will not cover the outstanding debt and fees. The same can also be the case if a borrower extends their loan for too long with their existing lender, especially if they are paying default interest at the same time.
In these circumstances it is obviously not the right thing for a new lender to take on the debt if it is only going to make the situation of the borrower worse. There is a clear duty on the part of the lender in these circumstances, to ensure that a further loan is in the best interests of the borrower. If it is clearly going to leave the borrower worse off it is not treating the customer fairly or providing an appropriate product.
Brokers have a really valuable and important role in this, to encourage their client to look at different options to exit their loan to leave themselves in a sensible position. Perhaps it is to take out a long-term loan or to sell the property while they still have enough equity to clear their loan and pay any fees or interest due.
So, there are situations where it is a suitable solution, but others where it is manifestly not in the borrower’s best interests and lenders have an absolute duty to decline a loan in these circumstances. However, by the broker and lender gaining a full understanding of the borrower’s situation and needs, and then applying skill, care and diligence, there are a number of occasions where a re-bridge can be the ideal solution for the borrower.