News & Views

Should bridging lenders help people get a better credit history?

At a recent conference one member of the finance industry apparently claimed bridging finance should be used to help people get a credit history so they would be in a better position to qualify for a mainstream loan. Writing in a well-known trade publication another industry speaker disagreed with this, claiming the bridging sector should not be harking back to the loan shark days, being a facilitator for people who "basically don't exist on paper in the UK."
The exchange has sparked a debate into what the real purpose of bridging lenders should be. Should bridging lenders accept that they can provide a service by helping people get a better credit history?
"Bridging lenders have never been about lending to people with excellent credit histories," says Fahim Antoniades, group director at Mortgage Centre IFA. "They were always about asset-based lending for short periods of time, in situations where it was clear that not only was there enough equity in the property to lend but also to, in some cases, roll up interest charges as long as there was a clear exit, to refinance the property or to sell it - therefore in 'no brainer ' situations."
Antoniades gives the following example. If a bridging lender was lending £100,000 on a property worth £200,000 over six months and the interest charges were £6,000, then the lender would lend £106k to the client if he knew that the client had a sale agreed on their property; thereby guaranteeing the money back.
"You can see why in a situation like this the client's credit history or payment track-record is irrelevant since you've already charged your interest upfront and know the loan will be paid off upon sale," he says. Of course it must be noted as well that for many people living in the UK – and especially in London – obtaining a credit history is almost impossible.
"Given that there are scores of EU nationals residing in UK as well as at least 150,000 Brits returning to the UK to live, there are probably 15% of 28 million households who do not have three year credit history and possibly encounter some issues getting credit," says industry commentator Mehrdad Yousefi, former head of marketing at the Bank of Ireland. "This does not mean they are all unsavoury people just because they are not on voters roll."
"Generally, the short-term loan market can indeed help some people to establish a credit history providing these people have got a job in our economy and can demonstrate they can meet their liabilities from their overall net income each month." Of course this is not an excuse that can be used by everyone without a credit history and, if the last few years have taught us anything, it's that risk needs to be taken into consideration and if a customer is deemed too high a risk they should not be lent to.
Bridging goes mainstream
Saying that, figures have shown bridging has become increasingly mainstream in terms of appealing to a broader audience in recent years than it was before the downturn. "Falling bridging rates have been integral to this, persuading borrowers that bridging isn't necessarily expensive and only accessible to wealthy property investors," says Melanie Bien, director at Private Finance. "The wider range of lenders moving into the market, and brokers focusing on this sector, mean that bridging is becoming an increasingly acceptable alternative to longer-term funding in the right circumstances."
Indeed, by becoming somewhat more mainstream the reputation of the bridging sector is continuously improving. It seems, as more consumers and brokers become aware of the uses of bridging, any negative misconceptions are disappearing. "Bridging lenders are shaking off their shaky past and becoming more respectable," says Bien. "Some lenders are even seeking FSA authorisation, which will help raise the profile and standards across the sector."
However, not all bridging lenders chase the same business. Jeff Knight, director of Tonic Marketing says, as with any sector, the winners are always those that can identify key segments and position themselves accordingly. "The level of mainstream lending will be dependent upon the individual lender's goals and appetite for risk and some might well prefer to target those who have experienced past credit problems. To suggest that bridging should be used to help people get a credit history is not a wise strategy. It used to be that any history of credit helped with a mortgage, which is why it was always seen as a good idea to have a credit card, for example. Things have changed."
Indeed credit scoring and profiling has become more sophisticated and Knight questions how many mortgage lenders would accept an applicant whose only credit history is with a bridging lender. "If they have had credit problems, the records of these won't disappear just because of having a bridging loan. Bridging lenders focus on providing a service that they are there for - providing a bridge between loans rather than a stepping stone to an alternative loan in the future; if there are not enough stepping stones, you won't reach the other side, unlike a proper bridge."
The landscape and purpose of the bridging sector, like much of the financial services industry, is changing as the recession and subsequent recovery have heralded a new dawn in the way the market works. But it seems as long as lenders remain focused on their core business and performing that business to a high standard the sector will continue to thrive and, indeed, expand.

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