While buy-to-let lenders brace themselves for further interventions as part of proposals currently being drawn up by the Prudential Regulation Authority (PRA), business in one often-overlooked corner of the market is currently booming.
Demand for bridging loans – short-term secured loans designed to bridge a temporary cash shortfall when acquiring a property – has surged.
Bridging loans were once perceived as a ‘last resort’ lending option. But with a growing number of borrowers attracted to the greater flexibility offered by alternative finance providers, including no minimum term and no exit fees, it is now expanding significantly faster than the mainstream mortgage market, which grew by 8% in the whole of last year, according to the Council of Mortgage Lenders.
The latest West One Bridging Index reveals that gross annual bridging lending broke through the £3.5bn barrier for the first time in 2015, which is rather impressive given that annual lending failed to even reach £1bn in 2012.
This annual lending figure for last year equates to £13.9m worth of transactions each working day in 2015.
Joshua Elash, director of bridging finance lender MTF, said: “It is positive to see an increase in the gross lending volumes and although there has been upward movement on both the weighted average interest rates and loan-to-values, both continue to suggest that the market is healthy for consumers and is behaving responsibly.”
Room for growth
Recent regulation from the EU’s Mortgage Credit Directive (MCD) should help lift future growth in the bridging sector, as will the incoming PRA rules that will see sterner affordability testing, stress testing and more robust risk management for lenders seeking to underwrite buy-to-let mortgage contracts, which will inevitably lead to the introduction of yet more stringent checks on landlords looking for mortgages, delaying the mortgage application process further.
Bridging, known for its speed, offers much faster time to completion than high-street lenders, and so it follows that short-term finance is easily outpacing the mainstream mortgage market, with West One Loans forecasting that bridging lending will to pass the £4bn milestone in 2016.
Duncan Kreeger (pictured) of West One Loans commented: “As the demand for fast finance looks set to rocket, an increasing number of borrowers will turn to bridging in 2016. Brokers who have previously never considered short-term finance for their clients are finding it increasingly harder to ignore.
The speed at which bridging finance can be implemented is the main reason for its use. Unlike mainstream mortgage lenders which have been reluctant to increase their short-term and commercial lending after the last recession, a bridging lender provides a real time solution to any potential funding gap by making available the required funding a purchaser needs to acquire property in as little as 24 hours.
Fresh research show that the main reason borrowers turn to short-term finance is to avoid delays with their long term mortgage, which can result in a potentially lucrative investment opportunity being missed.
“It is always a surprise to me that a mainstream mortgage takes such a long time to complete given that so much of the process is now automated by so many lenders,” said Kit Thompson (pictured), director of Bridging Loans at Brightstar.
“While it is full credit to the bridging industry that they can rise to the challenge to ensure that people do not lose the opportunity to buy their new home, it is surely time that mainstream mortgage lenders did likewise,” he added.
Race against time
The fact that short-term finance offers a much faster time to completion than high-street lenders naturally appeals to borrowers that require a very quick turnaround to secure the property they want to purchase, as was evident in the run-up to the stamp duty deadline on 1 April.
There was a 56% rise in bridging lending activity during the first quarter of this year, as buy-to-let landlords scrambled to secure short-term loans to finance the completion of property deals to avoid paying the 3% surcharge on second homes.
“We’ve just had our busiest month to date,” said Paul Wertheim (pictured), operations director at Mint Bridging. “The [stamp duty] deadline set by the government was not a surprise but the speed that the market moved did catch some bridging companies out.”
“As we have in-house solicitors at Mint, we were able to get the underwriters to approve the loans in 24 hours. This gave time for us to work to the completion deadlines,” he added.
From development and investment properties to homes with short leases that may be difficult to secure a mortgage on, bridging can be appropriate in a wide range of circumstances, but it is most commonly used in the residential sector to acquire properties at auction.
Homes under the hammer
Very few mortgage lenders, amid tougher borrowing rules, are able to provide purchasers with the necessary finance required within the relatively short 21-28 days completion period as is the case at auction, which is one reason why many auction goers turn to short-term finance lenders for an instant bridging loan.
Auction finance, available throughout the UK, is generally available for property purchases varying from £20,000 to £5m, although these loans do come at an inflated cost.
Keystone Property Finance is the latest in a growing number of firms to introduce new ranges of finance packages for auction purchases.
The company’s auction range includes a ‘valuation bypass scheme’, which helps speed up completions, and borrowers can chose between three-, six-, nine- and 12-month rates starting at 0.75% a month up to 70% loan-to-value (LTV).
Steve Olejnik (pictured), sales director at Keystone, said: “We will continue to offer solutions to both individuals and limited companies, including those with impaired credit and non-standard construction types.”
Even though short-term finance is a more costly way to raise funds to purchase property, it does provide buyers with confidence to purchase property at auction knowing that they will have the funds in place to complete a transaction, before eventually obtaining a more attractive deal from a conventional mortgage lender.
“The mortgage market just can’t meet the timing expectations of the borrower, and the short term finance solution allows the transaction to happen in a timely manner,” said Chris Whitney, head of specialist lending at Enness Private Clients.
When selecting a bridging loan provider, Robin Skuse at the National Association of Commercial Finance Brokers, recommends that a borrower seeks a lender who has “specific relevant experience in their geographical area”.
A relationship-based approach also resonates well in this specialist lending market, and so it is also important that customers are confident that they are working with a supplier that fully understands and buys into their requirements, possessing the knowledge and expertise to appropriately structure a finance agreement, according to Claire Pender, head of Marketing at Bridgebank Capital.
She said: “Landlords should have transparent, direct communication with both their business development manager and underwriters throughout the loan process to ensure that all those involved in the case have an in depth understanding of the project and financing required at all times.”
Although the number of bridging loans written continues to grow, as short-term finance becomes easier to obtain and most mainstream lenders fall short in terms of the agility and speed that is required by many investors seeking finance, it is important that people are securing bridging finance for the right reasons.
Borrowers must factor in and fully understand the implications and costs of taking out a bridging loan into their investment plan because the terms differ greatly to mortgage lending and so that means having a clear exit strategy in place.
Short-term loans are designed to meet short-term financing needs, and so an exit plan is an imperative aspect of taking out a bridging loan.
“Bridging finance should only ever be perceived and entered into as a short term funding solution, to progress a property project to a point at which a sale or term mortgage can be completed,” Pender added.
Demand for alternative sources of finance will almost certainly continue to grow in popularity but a borrower must have an idea of how they are going to repay the loan as quickly as possible or risk running into serious financial difficulties and potentially losing the property if they cannot make the payments.