News & Views

The rise of bridging finance

Bridging finance has had a tough time over the years. The specialist, niche sector has had to work hard to shake off the unflattering image it has found itself painted in. Commentators, uneducated in the uses of bridging loans, often painted the industry in a negative light. Of course, rogue traders did little to help the honest lenders in trying to promote a positive image of the bridging industry.
While the reputation of the sector is now much better, with the product receiving the recognition it deserves, every now and again there's a setback. A recent article in a national newspaper, for example, risked setting the industry back several steps.
It claimed 'trapped' homeowners were being tempted by 'expensive bridging loans', which should only be used 'as a last resort'.
But such scare mongering in the media is slowly becoming a thing of the past. The view of bridging amongst the industry and consumers is changing. "What is most notable about some of the players in the bridging market is the ability to be opportunity led and entrepreneurial in their approach to structuring funding," says Fahim Antoniades, group director at Mortgage Centre IFA. "Narrow perceptions of closed bridge property purchase transactions are being broken down and replaced with knowledge-led short term funding providing solutions and maximising profitability."
More than just a last resort for desperate funding
Antoniades says expansion and increased competition in the short-term lending space is enabling product extensions, increased choice and competitive pricing, which can only be a positive not just for the property market but the economy as a whole. "By providing the necessary first step, bridging companies are not only enabling individuals and companies to rebuild their portfolios but are providing a positive boost to the economy," he says. "In essence bridging is more than just a last resort for desperate funding, offering not just a service but a trusted partner." Indeed the uses of bridging are increasing but, more than this, they are becoming better known. As Antoniades points out bridging was often viewed as very much a last resort, something which is far from the case.
"Most borrowers using bridging are investors; when the loan is due, they either sell the property at a profit or refinance with a bank," says Melanie Bien, director, Private Finance. "Properties declared unmortgageable by lenders, because they don't have a kitchen, for example, can be bought using bridging finance, then refinanced with a high-street lender once the kitchen has been installed." Lenders tightened their criteria in recent years meaning many properties that a client would have been able to get a mortgage on a few years ago will be deemed unmortageable now. As Bien points out bridging is a useful product to purchase the property and then make the necessary renovations.
Bien says bridging is also useful to bridge the gap between buying and selling. "Clients who can't find a buyer their property within the necessary time frame and want to make sure they are not forced into selling at a discount can use bridging finance to bring this about," she says.
Bridging finance is useful because the funds are accessed quickly and as long as they are repaid within a short time frame they can be excellent value. Of course, bridging finance is not for use in any circumstance. It is often miss-education of bridging finance that leads to borrowers using bridging products when they are not necessarily right for them. It is this that can result in negative misconceptions of bridging finance.
So when shouldn't bridging finance be used? The most obvious answer is when the borrower does not have a plan in place for repaying the loan. "If the borrower does not have a realistic exit strategy, then bridging is extremely risky and should be avoided," says Bien. This became a significant problem as the credit crunch took hold. Lenders shut up shop in many cases and tightened the reins on their lending so much that consumers looking to access any kind of funding came up against a brick wall.
This made short-term finance more of a necessity but made repaying it more difficult. But as the UK has climbed out of recession and is undergoing a somewhat tentative recovery lenders have become more willing to lend.
More brokers are moving into bridging finance
According to the British Banker's Association the number of mortgages approved for house purchase rose to an eight-month high during March. Figures showed there was a total of 31,660 loans approved for people buying a new home. This was the highest level since July last year and was 5% more than during February. With lending returning, for bridging to reach its full potential it's important that more people, and indeed, brokers are educated in the benefits of it as a product. Melanie Bien believes there is work to be done. "It's an on-going process," says Bien. "More brokers are moving into this area on the back of pent-up consumer demand and more lenders offering such products. But it can be a complex area so brokers have a duty of care to their clients to explain the pros and cons of bridging finance."
Mehrdad Yousefi, industry commentator and former head of marketing at Bank of Ireland Mortgages says things are improving. "Due to the global financial crisis, most brokers are better educated about the bridging finance market than they were in the heady days of the mortgage boom in 2004 to 2007," he says. "Many consumers are still a little confused about bridging finance and the fees involved as most bridging financiers do business via brokers."
Providers are best placed to educate brokers and simple, clear products and fee structures help to make bridging easier to understand and more accessible for consumers and brokers alike.
What the brokers say:
Melanie Bien, director, Private Finance: Bridging finance has really got a place in this more stagnant housing market in which the traditional mainstream lenders are demonstrating a reluctance to lend. Investors need to find financing from somewhere, and bridging lenders are stepping into the breach. Bridging finance may be expensive but investors welcome the fact that they can access capital when they need it.
Fahim Antoniades, group director, Mortgage Centre IFA: What was once a niche, cottage industry is now moving towards being more institutionalised. Whilst many successful bridging companies from the past continue to lend limited sums of private money more recent entrants to the industry are available to do business on a larger scale with the combination of private equity and substantial external funding lines. Such a shift is enabling better access to quick and reliable funding supporting enterprise in the property market.
Andrew Montlake, director, Coreco: The general view of the sector has changed as bridging has come more into the mainstream and become more professional. This shift has been especially led by a handful of lenders who have helped to redefine the image of the sector.

House prices increase in May as London is set for a hike

House prices increased by 0.3% in May from April, according to Nationwide's House Price Index. Prices are up 0.6% on the previous three months but 1.2% down on May 2010. Robert Gardner, Nationwide's chief economist, says: "House prices increased by 0.3% in May, only just offsetting the 0.2% fall recorded the previous month, and leaving prices 1.2% below the level prevailing in May 2010. "

Meanwhile estate agents and brokerage Savills has revised its forecast for house prices in London. It had originally predicted house prices in the capital would fall by 1% in 2011 but now predicts a rise of 8%. The new figures are based on strong demand from overseas buyers.

Lenders urged to promote home building

Housing minister Grant Shapps has written to mortgage lenders in the UK stating he would like to see self-build homes become commonplace and urging lenders to help make this possible. Shapps says a "self-build revolution" supported by lenders is needed to help increase the supply of new residential properties.

The housing minister wanted to reassure lenders who are concerned about lending money to self-builders - traditionally seen as higher risk. He told lenders that out that of the 15,000 funded self-build homes built over the past 10 years, less than 50 have been repossessed. Shapps says self-builders deliver affordable, greener and more innovatively designed homes and make a big contribution to the number of new homes built in this country.