Bridging applications should be assessed holistically. That means understanding a property’s value and appeal to certain purchaser profiles, the borrower’s experience and the credibility of a proposed exit plan. But the liquidity of the subject property is arguably the most important consideration.
Put simply, liquidity is the ability to sell a property within a reasonable timeframe, at a price that allows the lender to recover its exposure. It is a measure not just of what an asset is worth, but how readily that value can be realised. For a bridging lender, that’s a critical distinction.
That’s why a property’s ability to sell quickly should be at the heart of every lending decision. A strong valuation offers reassurance, but if the lender cannot realistically recover that value within the required timeframe, the security may not be as strong as it first appears.
Unlike traditional mortgage lending, bridging finance is short-term by nature, with loan terms typically ranging from 6 to 18 months and repayment expected through a sale, refinance or another identifiable source of funds.
Low leverage is always helpful, but one of the most important distinctions a lender must make is between the market value of a property and its liquidity.
A property might have a valuation of £2 million, supported by comparable evidence and a detailed surveyor’s report. But if the pool of potential buyers is extremely limited, or if comparable properties regularly take 12 months to sell, that valuation provides only part of the picture.
Contrast this with a conventional residential property valued at £500,000 in a well-established location, with strong demand from both owner-occupiers and investors. The latter may represent a considerably more attractive lending proposition, even if the security value is substantially lower and the leverage is more aggressive.
For a lender whose capital is committed for a relatively short period, this is an important consideration.
LIQUIDITY IS IMPORTANT REGARDLESS OF THE PROPOSED EXIT
Where a borrower’s intended exit is the sale of the property, the importance of liquidity is obvious. The lender needs confidence that the asset can be marketed, attract suitable buyers and complete within the loan term. A credible sales strategy, realistic asking price and evidence of local demand are therefore essential.
But liquidity is just as relevant where the proposed exit is refinancing or another source of repayment.
Take a bridging loan where the intended exit is refinancing onto a longer-term mortgage. The borrower may have a compelling business plan, sufficient projected rental income and an expectation of meeting the refinancing lender’s criteria. Nevertheless, refinancing is never guaranteed.
Interest rates can change. Valuations can fall. Rental income may disappoint. Lending criteria can tighten, or a borrower’s financial circumstances may deteriorate.
Even where the refinancing strategy appears entirely reasonable at the outset, circumstances beyond the borrower’s control can prevent it from materialising. In such situations, the bridging lender must consider what happens next.
If the borrower cannot refinance and alternative repayment arrangements cannot be agreed, the lender may ultimately need to enforce its security and recover the debt through a property sale. At that point, liquidity moves from being a secondary consideration to potentially the single most important factor determining the outcome.
THE IMPORTANCE OF UNDERSTANDING THE BUYER POOL
Assessing liquidity requires more than reviewing comparable sales and accepting the headline valuation.
Underwriters will consider who would realistically buy the property, how many potential purchasers exist and what factors might discourage them. Is the property suitable for mortgage-backed buyers, or would purchasers need to be cash buyers? Does it appeal to a broad market, or only a small group of specialist buyers? Are there title, planning, construction or occupancy issues that could complicate a transaction?
Location, property condition, price point and local market activity all influence the answer. Importantly, lenders should also distinguish between a property being saleable at its assessed market value and being saleable within the timeframe necessary to protect their position.
A property may eventually achieve its valuation, but if doing so requires a lengthy marketing campaign, it may not provide the level of liquidity a short-term lender requires.
That does not necessarily mean the property is unsuitable security. It may instead justify a lower advance, additional security, a more conservative assessment of recovery value or a longer loan term.
ACTING IN THE BORROWER’S BEST INTERESTS
This is where the market can become more complicated. If a lender believes the borrower cannot realistically exit within a certain timeframe because of limited liquidity in the underlying asset, the loan term should be structured to allow sufficient time for repayment.
The difficulty is that doing so can make the lender’s terms appear less attractive.
Where interest is retained or rolled up, a longer loan term generally means a greater interest provision and, usually, a lower net loan available to the borrower. For purchases, that means the client may need to contribute more cash. For refinances, it could mean the net loan is insufficient to repay the existing lender.
Neither outcome is particularly appealing.
The result is that lenders can face a difficult choice: offer a shorter loan term that may be unrealistic or provide a longer, more appropriate term that makes the overall proposition less competitive.
My view is that, in the current market, where exits are becoming more challenging to achieve, any bridging loan with a term of less than 12 months deserves closer scrutiny.
Brokers should check the small print. If a lender charges significant fees when loans are repaid late or require an extension, it’s worth questioning why such a short loan term was agreed in the first place.
The true test of good security is not simply what a property is worth when the loan is written, but how reliably and quickly that value can be recovered when it is needed.
For that reason, liquidity should sit at the heart of every bridging lender’s underwriting decisions.
