There’s no consistent definition of Indicative Terms in bridging, so it’s your responsibility to ask exactly what’s being offered, says Scott Marshall, founder of Roma Finance
At an early stage of the bridging loan process, you or your broker will receive ‘Indicative Terms’ from the lender.
This can also be known as an Initial Offer, Agreement In Principle or Decision In Principle.
And, just as there’s no consistency in its name, there’s very little in its contents either.
That’s why the borrower (or the broker acting on their behalf) needs to satisfy themselves that they understand every aspect of these Indicative Terms. If you don’t, you need to ask the lender.
Due diligence required
In an ideal world, every Indicative Terms document sent out by bridging lenders would be clear, fair and transparent, as well as comprehensive and easy to understand. I believe the contents should also be consistent across the sector, a bit like an ESIS for a mortgage which shows the key features and risks of the mortgage contract for a customer.
In an unregulated market that’s unfortunately not the case.
You can get Indicative Terms that mean little more than a lender saying ‘we might be willing to lend this much in theory’.
But you can also get committed terms where the loan has already been underwritten or is simply subject to valuation and legals.
And everything in between.
As you can imagine, this makes a huge difference, so it’s really important you know what exactly is being offered, and how much underwriting, if any, has already been done.
15 questions you need answered
There is a lot of information that could be included – or missing – from your document.
Here’s a list of 15 specific things that ought to be outlined.
If your ‘Indicative Terms’ letter doesn’t answer these questions, ask the lender for clarification.
- What is the gross loan and net loan? (the amount the borrower or their solicitor will be sent after fees and deductions)
- Are the terms subject to valuation and/or legal work?
- What level of legal due diligence will be carried out? Does the lender accept dual representation or will the borrower require their own solicitor?
- Has the borrower been credit checked?
- What other checks need to be done?
- Are all the rates, fees and charges clear? Could they, or even the loan amount, change before completion? If they can change, on what basis could they change?
- What is the structure of the loan – for example, does it include a maximum facility with drawdowns?
- If the loan includes drawdowns, is it clear on what basis and when these tranches will be released?
- How is interest calculated – deducted, serviced, or rolled up?
- Is there a broker or introducer and how much is being paid to them in fees and commission?
- What security is being taken for the loan?
- What is the term of the loan and what happens if the borrower needs more time to repay the facility or more money to complete the project?
- What happens to the borrower’s data – are data protection procedures in place?
- How long are these Indicative Terms valid?
- What are the next steps if the applicant wants to go ahead?
All bridging lenders have their own way of issuing Indicative Terms, so there isn’t one consistent or correct template.
The more information the better, and most borrowers and brokers would prefer to work with lenders that provide everything needed to make a decision.
But how do you know what you’re going to get at the initial enquiry stage?
You don’t, unless you’ve dealt with the lender before or the lender’s Indicative Terms are sufficiently clear.
But there are some clues as to whether a lender is likely to give you clear, fair and not misleading terms.
Look for lenders that are members of trade associations, for example. They tend to work proactively and collaboratively to improve the industry and are more likely to ensure that all of their communications are clear and thorough. Members of the NACFB, ASTL or FIBA, including Roma, work hard to do business properly and ethically, and to raise standards across the sector. This gives you a gauge as to the integrity of the lender. Roma is also one of a small number of bridging lenders who is a member of The Lending Standards Board.
Know your terms
Remember, Indicative Terms should contain all the information you need to weigh up the loan.
Scant, ambiguous terms that don’t make it clear what level of work or underwriting has been done, help nobody.
You can be certain that when Roma issues Indicative Terms, we do it in a responsible way that is clear, fair and transparent.
And we’re always ready to answer any questions from the broker or applicant.