As the mainstream mortgage market braces itself for yet another clampdown on buy-to-let lending, a growing number of property investors are turning to alternative finance options to overcome tougher mainstream mortgage lending criteria and stress testing, such as bridging loans, short-term secured loans designed to bridge a temporary cash shortfall, when purchasing property.
From September the Bank’s Prudential Regulation Authority (PRA) will expect mortgage companies to take more care when evaluating landlords who own more than three properties, and to restrict what they can borrow.
The PRA has also set out tougher buy-to-let requirements, which compel lenders to ensure that landlords can generate higher rents relative to their mortgage costs, and this has also contributed to the surge in demand for bridging finance.
Bridging has markedly raised its profile in recent years. It is also becoming better understood, and that largely explains why the latest West One Bridging Index shows that gross annual bridging lending reached a record-high of £4.2bn in April, as more homebuyers are attracted to the greater flexibility offered by alternative finance providers, including no minimum term and no exit fees.
To help us understand more about the opportunities that bridging finance offer, Daniel Owen-Parr, commercial sales director at Together, has taken time out of his busy schedule to answer a few of our questions.
Why has demand for bridging loans surged in recent years?
The property market remains strong overall, despite the transitional phase that we’re entering as we negotiate our exit from the EU. Low interest rates, a strong rental market and government initiatives to help ensure the market is accessible for new entrants all contribute to the continuing rise in house prices, whilst the ongoing shortage of demand means homebuyers and investors alike will compete for the best properties. The demand for bridging finance goes hand-in-hand with this. Most often, bridging is used to repair a broken property chain, or to help buyers snap up a bargain, whether that’s a new home or a commercial investment.
Bridging, known for its speed, offers much faster time to completion than high-street lenders, and that is why many property auction goers use bridging finance. But are there many people buying through private treaty, such as those stuck in a property chain and requiring finance sooner rather than later, using short-term finance solutions to help complete a transaction?
Short-term finance is particularly popular for auction purchases because of the short timeframe buyers have to complete the sale; usually 28 days or less, so we offer a tailored product for this, based on our years of experience in the auction market where the buying process is quite different. Using short-term finance means the buyer can secure the property they want within the tight timeframes and then typically will refinance with a mainstream lender for the longer term. In addition, it means that if there is considerable refurbishment required, which might deter a mainstream bank, the buyer can get funding for the short-term and then refinance once the renovations are complete.
It’s also a popular form of finance with investors looking to snap up bargains, whether that’s at auction or buying the traditional route, due to the speed and flexibility it offers. Bridging loans can be delivered much faster than a traditional mortgage, so the investor can beat off the competition by offering a quick completion, and the interest can be rolled up so that there are no payments until the end of the term, giving them time to secure a longer-term facility.
For homebuyers, bridging loans are often used to repair a broken chain, to beat off competition for a popular property, or to step up the property ladder. In one recent case, we provided a bridging loan to a customer that risked losing their dream home when their mainstream finance provider pulled out, just weeks before they went on holiday.
We reviewed the case, with the property valued at £5.25m, and agreed short-term funding of £2.1m, with a loan-to-value of 39 per cent. The whole process took less than two weeks, with funding delivered just two days after the offer was issued, so the customer could go on holiday with peace of mind.
It all comes back to our common sense approach. We offer bridging across different areas of our business; both commercial and personal finance, and we’ll look at each case individually, ensuring the customer has a clear exit strategy when they take out the loan.
Why does a mainstream mortgage take such a long time to complete given that so much of the process is now automated by so many lenders?
Timeframes will vary with different lenders and whilst elements of the process are likely to be automated, there will still be input required from different sources, such as valuers, solicitors and so on, that has to be taken into account. The checks that are in place are for the customer’s protection so when it comes to mortgages, buyers need to factor in realistic timescales. Some processes, such as right-to-buy may take a little longer than others, as there is liaising with the councils as well, so it will depend on the type of mortgage and the lender.
When speedy funding is needed, this is where bridging finance can help, and estate agents can help clients that may find themselves in a tricky time-sensitive position by knowing where to signpost them. It can often be an ideal interim solution that allows all parties to proceed with the purchase and the buyer then has plenty time to arrange the long-term mortgage once they are in the property.
Is bridging finance something that estate agents should be recommending to clients seeking greater flexibility?
Each case is different so it will always depend on the individual circumstances but certainly estate agents need to be aware of the different forms of finance on offer, as it could save their buyer from losing the property of their dreams.
Does Together offer agents any referral fees?
Together works with a wide variety of introducers, including estate agents, and we offer a 1% fee to estate agents that refer a customer to us.
In your opinion, what are the key benefits of bridging finance as opposed to traditional lending?
They both have their own benefits but serve difference purposes. The main advantage of bridging finance is the speed, as funding can be provided within timescales that would simply be out of reach with a traditional mortgage. There is also more flexibility with bridging too. For example, lenders like ourselves will allow customers to cross-charge on two different properties, using their existing property and new purchase, which can provide scope to access greater capital that a mortgage would allow. In today’s property market where the step up the ladder has become a rather larger leap, this can be really valuable.
What would you say to a borrower who is wary about bridging finance?
Do your research and talk to a financial advisor as there are lots of different options out there. The market has shifted significantly in recent years so there is a broad choice of products, with some really good rates. Earlier this year, we launched our lowest ever regulated bridging rate at just 0.49% per month, which is the lowest on the market for up to 50% loan-to-value, and our commercial rates are very competitive too. The important thing is that the customer must have a clear exit strategy before taking out the loan - it is a short-term solution so there has to be a plan for the longer-term finance.
What are the greatest concerns facing the bridging industry at the moment?
The bridging industry has seen strong growth in recent years, according to the data from the ASTL (Association of Short-Term Lenders) and they predict that growth will continue, although obviously as we prepare to leave the EU it is hard to forecast at the moment. The property market will have a big influence on the bridging market, so at present the outlook for bridging is a positive one.
In a sector where there are both regulated and unregulated products on offer, there is a broad choice for customers, with new lenders entering the market, as well as the longer established bridging finance specialists like ourselves, but competition is healthy and is ensuring the customers; whether residential or commercial, have lots of choice.
Do you think demand for alternative sources of finance will continue to grow in popularity?
The growing demand for alternative forms of finance has been fuelled by the increasingly rigid criteria which many mainstream lenders apply and that is unlikely to change in the near future, so we would expect that customers will increasingly look elsewhere for finance.
For example, specialist lenders like Together will lend on what the traditional banks would deem a non-standard property, such as a high-rise flat, properties in need of renovation that may exclude them from the mainstream, customers with complex or multiple income streams, and different types of purchase such as right-to-buy or shared ownership.
Given how many of us could fall outside the tighter mainstream criteria, for a whole variety of reasons, it’s easy to see why alternative forms of finance are on the rise, and our growth at Together would bear this out.
Last year, we lent just under £1.1bn, whilst our loan book is more than £2bn and we expect to see growth continuing as move forward.
*Marc Da Silva is Estate Agent Today and Letting Agent Today Features Editor. You can follow him on Twitter @propertyjourno