24th March 2015

But which is the stone that supports the bridge?

There are plenty of niches within the mortgage finance arena but there are perhaps few with as mixed a reputation as that of the bridging loan sector. The metamorphosis of the bridging loan market from a rather underwhelming, but necessary, form of finance predominantly used when purchasing at auction or to free up a chain, to a seemingly all-encompassing product which is used in an increasing number of transactions has without doubt taken place over the past five years or so.

Unsurprisingly, the renaissance and the development of a much wider bridging loan proposition coincided neatly with the Credit Crunch when more traditional finance avenues dried up and many developers, for example, had to look at alternative options in order to complete their developments. Since then the bridging sector has expanded significantly – we now have tens of lenders active with many specialist and bridging-only lenders offering products as well as the highly niche players who are funded through a variety of means.

This lender appetite, and an increased difficulty in securing finance in other areas, has catapulted bridging into a multi-billion pound sector. Recent figures from the trade organisation, the Association of Short Term Lenders (ASTL) suggests that its members took in applications worth £2.27 billion during 2014 however it’s not clear what volume of those applications eventually completed. The sector has apparently breached £1 billion lending volume in recent years though and this puts it in the realms of product areas such as equity release.

Having a highly competitive bridging lender market has certainly aided the interest in the products and, as stated previously, the ability to secure finance in an extremely tight market has often been a god-send for bridging loan borrowers. Within this market it is advisers and intermediaries who remain the go-to operators and we are seeing similar distribution models adopted here – by the most successful lenders – as we have seen in other areas of specialist lending. The fact that significant volumes of bridging lending are also unregulated has drawn in both advisers and lenders, and perhaps unsurprisingly there has often been the whiff of the unsavoury around some players within the bridging market.

Which is not to say that those active are responsible for the reputation that can come with bridging loans – major lending players like Precise Mortgages, Shawbrook Bank and others have done sterling work in cleaning up the market and developing propositions which are both customer and compliance-friendly. However, there is no doubting that the bridging sector is firmly on the FCA’s radar and has been for some time mainly to do with its primary concern that unregulated products are being sold when a regulated, far cheaper option could have been much more in the customer’s best interests. 

The FCA has mentioned many times in dispatches that it is actively keeping an eye on this market and has warned regulated advisers that they will need to have watertight paperwork when it comes to their recommendations – particularly unregulated bridging loans. A firm focus on bridging loans and the potential for extreme damage has been exacerbated in recent years by the collapse, for example, of bridging lender TIUTA and its funders, Connaught Asset Management, who both went to the wall owing creditors and investors many millions of pounds.

So it is perhaps not surprising that advisers are being urged to be vigilant and to ensure the credibility of their advice and recommendations when it comes to bridging loans. Commission bias – i.e. advisers pushing bridging loans based solely on the fees that can be generated – has also been a constant concern mainly because of the large amounts that can be earnt. This, after all, is short-term finance and the rates are on a daily/monthly basis which can add up to significant amounts over a short period of time – certainly in the post-Credit Crunch period one wonders whether some advisers’ default setting was to recommend bridging loans purely based on the income it would bring in. Again, in more recent times, it is an area which has undoubtedly drawn the regulator’s interest and will continue to do so.

However, the fact is that bridging loans can often be the perfect solution to some customers’ financial needs and, those traditional uses of these loans, such as using it to purchase a property while yours remains unsold, or using it to purchase at auction, are still absolutely relevant. The customer base has been widened though and those using it to fund a property’s development have grown in number. Advisers would also be wise to be particularly clear about the level of fees charged by lenders – another criticism of lenders in the past has been the large level of fees charged and the number of additional charges that can be made. Facility fees, administration fees, legal fees, etc, can all add up and there needs to be complete transparency about what the customer will eventually end up paying.

As the wider mortgage market grows and new and existing lenders up their own appetites, many have suggested the bridging loan sector would see something of a downturn. The most recent bridging lending numbers do not appear to reflect this – in fact, significant regulatory changes such as the MMR might well have helped rather than hindered bridging loans’ continued popularity. There are a significant number of players competing vigorously in this space which means that pricing has remained low and looks likely to do so for some time. As with any product, the big focus is on client suitability and ensuring there is a properly thought-through exit strategy ensuring the borrower does not pay the high levels of interest for any longer than necessary. If this can be achieved, and the client is comfortable with all arrangements, then a bridging loan can be a suitable, if potentially expensive, option.

Mortgages