Bridging Loan Market Overview We interview Merrick Malouf, Managing Director of Prime Finance about how he sees today’s market situation. Editor: Merrick how do you see the current situation in the Bridging Loan Short- Term Loan market space? Merrick: We’ve all seen some dramatic changes in both the finance and real estate markets. Lenders have had to tighten credit policy while real estate market outlooks remain soft and patchy. With the general downturn in business activity across Australia, we have seen a significant drop in business borrowing. Not only are businesses borrowing less, individuals are also more cautious their investment decisions. In real terms, we have seen a fall in enquiries of more than 50 percent over the last 12 months. In addition, a higher proportion of applications are failing due to lower than expected property values as owners adjust their market expectations. In my opinion, outlook remains bleak with these conditions unlikely to change significantly over the next 12 months. These conditions provide the ideal opportunity for State and Federal Governments to encourage investment through the implementation of investment or tax incentives for both business and private investors. In this economic environment, investors are worried about the security of their investment and the return available over the short term. Property has taken a severe shock and many investors have experienced losses in the property market yet recent losses in the stock market show that property is still a good long term investment option. An effective tax incentive scheme would bring confidence and enthusiasm back to the investment property market by encouraging investment in residential and commercial development. New construction projects will bring new jobs and increased activity in both the real estate and finance industries. Editor: Now we would like to know a little more about your market space. Merrick, could you please briefly define the market for Bridging Loans? Merrick: A bridging loan is a type of Short Term loan. As the name suggests, a bridging loan “bridges the gap” between loans, such as when you are selling your home and buying another, over as long as 6 months. A bridging loan may also be used to purchase an investment property with the loan repaid when the investment property is refinanced. Other types of Short Term loans include business loans and construction loans. A short term Business loan allows business owners access to the equity in their property to cover an unexpected expense or exploit an opportunity. This interest-only facility is secured by a 1st or 2nd mortgage and interest is paid monthly. Typically the term of the loan is between 1-6 months. The loan is repaid by the proceeds of the opportunity or refinance of the security. Construction loans fund the development of homes, duplexes, townhouses, units and commercial or retail sites. Interest is capitalised into the loan which is secured by a 1st mortgage over the site. Often collateral security is required. Terms are 6-18 months. The loan is repaid when the project is completed and sold or refinanced. Short term loans have the following features: Simple application process Fast approval (in 2 hrs) Quick settlement (in 5 days) Easy to discharge Use residential, commercial, retail or industrial property. Editor: Merrick, what makes Prime Finance different from other sources for these type of bridging loan funds? Merrick: Perhaps one of the most significant differences is that we use our own funds to lend. That means we can make a decision quickly, without the delay of a credit committee and we’re never waiting for funds to settle your loan. We have been involved in real estate property and lending for many years and our experience has allowed us to avoid some of the potholes that caused some of our competitors to stumble and fall. We perform a comprehensive due diligence program that underpins our responsible learning policy. We love to help our customers achieve their goals. Editor: Can you let our readers know the common mistakes or pitfalls that brokers can make and should be aware of when trying to obtain bridging loans for their clients? Merrick: Perhaps the most common mistake or rather omission is that the broker has not clearly explained the use, purpose and other conditions of a short term loan. A short term loan should only be proposed where its use will bring a net improvement in the customer’s position, not as a source of easy finance. Secondly, a short term loan still requires the same basic form as a home loan, i.e. application-assessment-approval-settlement-loan management-discharge. So similar documentation is required and where documentation is not properly completed and executed, this can be one of the main reasons for delays in the process. Finally, many brokers fail to help their applicant plan and prepare an effective and reasonable “exit strategy”. The biggest problem that we see often is that the proposed exit is the sale of the property, however in current market conditions this may not be wise and will further devalue the current value of the security property. However if that is the exit, then, the client will need to provide documentation confirming the engagement of an agent and the marketing plan proposed. Editor: How do you see the market and interest rate movement over the next six months? Merrick: I think that most of us agree that business conditions are tough at present. Things have eased in the last month as business owners come to terms with doing business in a new environment, however it seems likely that these conditions will persist for another 12-18 months with only slight improvements in business confidence. Interest rates are likely to rise over the next year as consumer confidence grows. However, the effect of an interest rate rise is likely to be diluted by increases in unemployment. It should be noted that conditions like this offer new opportunities for the astute so it’s a good time to remain cautious and to apply ourselves to those opportunities when they arise. Lenders will continue to tighten credit policy or even drop products such as construction finance. This may provide increased opportunities for lenders who are cashed up and identify and understand the risks of this very profitable finance product. Editor: Thank you, Merrick Merrick Malouf is the Managing Director of Prime Finance, a private lender that specialises in providing Short Term loans, including bridging loans, business loans and construction loans. Prime Finance writes hundreds of short term loans a year with funding of over $20M available. They specialise in fast approval, quick settlement business loans. All articles that appear in Finance Broker Online are written independently by various authors and should not be taken as the expressed views of Finance Broker Magazine Online, or an endorsement of their products, services or companies.