News & Views

Opinion: Do exit routes matter in bridging?

By Matthew Anderson, director, Fincorp

I am often frustrated when faced with opinions and news in our mortgage trade media that get bridging all wrong.

One of the most frequent culprits is the affordability / exit route dynamic. People are forever bundling a whole lot of quite different sorts of lending into one catch-all “bridging” term. But the specifics of a loan are absolutely fundamental to where you, as a lender, put the emphasis in this dynamic.

In mainstream mortgage lending – and indeed in regulated bridging – affordability is key. Borrowers shouldn’t be taking loans they cannot afford to repay each month. This has quite rightly been enshrined in the Mortgage Market Review rules that will come into force next April. Similarly mainstream mortgages need an exit route that doesn’t rely on property value because people buy homes to live in rather than as an investment.

As part of the MMR rules, regulated bridging loans will have to assess customer affordability as well and loans will not be allowed to be made unless lenders are satisfied borrowers can afford it. It’s this point that has stirred up a lot of confusion in my opinion.

Regulated bridging applies to loans made to consumers secured against their main residential home over a short-term period. Often these loans see the monthly interest rolled up and repaid on redemption and so the affordability calculation in its usual sense doesn’t really apply in the same way. The loan is also taken specifically because the borrower is planning to sell one residential property to fund the purchase of another so the exit is fairly demonstrably linked to the sale of the property. It’s a quirk of bridging that makes it very different from mainstream and long term mortgage lending.

But that brings me onto the source of my frustration. Everything I’ve mentioned so far falls into the regulated sphere of lending to consumers on properties they live in.

Bridging, for the vast majority, has nothing to do with that market. 95% of short-term lending is to professionals funding commercial projects, albeit secured on residential properties. The borrower is not living, has never lived and has no plans to live in that property.

It’s a whole different ball game – and as such this affordability / exit route dynamic should be viewed from a very different perspective.

In October this issue was raised again at the Association of Short Term Lenders’ inaugural conference. Brightstar Financial’s Rob Jupp – also chairman of the Association of Bridging Professionals - said he continued to be surprised that there are still lenders – not members of the ASTL or AOBP he hastened to add - that continue to lend without an obvious exit route being in place.

I am inclined to be a bit sceptical about these lenders’ need to do this for a couple of reasons.

Firstly, there are two obvious exits on bridging loans to professionals: sale or refinance.

The buy-to-let market has performed extremely well this year and that has made a big difference to the availability of the latter of these two exit routes. There is also an increasing appetite from lenders within the short-term market to refinance these loans as well. Omni Capital and Dragonfly both offer more medium term loans for professionals looking to refinance off a bridge but who don’t take a buy-to-let loan.

My second reason for scepticism is that sale – the most traditional exit – is an elusive thing to agree up front. It is a perfectly reasonable commercial decision for a developer to purchase a property, bridge to fund refurbishment and then plan to sell in six months’ time. Proving that it will sell and for what is impossible because no-one has yet cracked telling the future. That’s why we as lenders spend so much time learning our market, the supply of property, buyer appetite for different sorts of properties and why we are conservative when valuing properties.

Ultimately this is a commercial investment and as the regulator is so fond of saying: investments carry a risk. Even having said that, it’s a risk that is mitigated as much as is possible in reality.

The worrying thing that Rob’s point raises, however, is that some lenders in the bridging market could be abusing this. There is an underlying concern that some lenders may be happy to lend short-term without checking an exit route and in the full knowledge the loans would be out for longer periods of time. This means when borrowers find themselves in need of a loan extension, lenders can crank up the rate or hit them with a term extension fee and there are those, he suggests, who are backdating penalty fees or charging a penalty rate from the start of the loan if the borrower defaults.

This type of practice is clearly unethical and it does our industry no favours if it is going on. My sense is that if it is, it is a minority. But equally, Rob is right to raise it as an issue and criticise those who let it go on.

Ultimately short-term lending provides valuable and valued funding to property professionals. It is entirely possible to do business with them in a clear and simple way that is profitable for both parties without relying on shady practices. And we should hold those who persist in poor practice to account.

Bridging is diverging into a tale of two markets

Bridging is splitting into two distinct markets and the industry must acknowledge it serves two very different sorts of customer, says Fincorp.

Rather than being a straightforward short-term market, bridging is now two separate markets: short-term residential loans to consumers that fall into the regulated sector; and short-term loans to professionals looking at commercial opportunities in the unregulated sector.

Fincorp believes there must be a stronger division drawn between the two in the same way that residential mortgages and buy-to-let are separated.

Matthew Anderson, director at Fincorp, says this shift reflects the fact that the term “bridging” doesn’t refer to the type of lending it used to.

Anderson said: “There’s regulated lending on a short term basis which necessarily has more onerous underwriting criteria. This is often done by lenders who have only been doing bridging for a few years and perhaps have more of a background in mainstream lending.

"And we have short term lending to professionals in the commercial sector of the market who are developing properties that ultimately will end up in the residential market."

Anderson said both types of loan have a place in the market and welcomed the increasing competition bridging has experienced over the past few years.

But he added: "It's important we don't confuse these two very different sorts of customer and end up driving the availability of loans to professionals into the ground."

The bridging lender’s claim follows Mel Fordham, chief executive of broker Centrado, suggesting bridging lenders were starting to “act more like the mainstream as lenders start to apply a regulated ethos to what they do”.

Fordham told Bridging Introducer: “We have an enquiry at 55% loan to value for £600,000 which has turned into a ‘30 item’ request list from the lender; so they will want to see six month personal bank statements, they want to see the payment profile for a car loan the customer has taken out and pretty much the details of his entire financial life.”

Anderson said this example highlighted the need for more accurate division of the two sides of the short-term sector.

He said: “It comes back to how we understand what bridging is. The need for protracted underwriting is reminiscent of the regulated and consumer mortgage market.

“In the short-term sector where we are lending to property professionals looking at development opportunities, putting the borrower under a microscope like this is excessive.  A different, just as thorough, but faster, type of underwriting is needed. But some lenders who offer mainstream mortgages or regulated consumer bridging loans are lumping the commercial part of the market in with residential loans.”

Fordham suggested that the more onerous underwriting was a direct result of more bridging lenders becoming regulated and the regulator therefore looking more closely at their commercial business and the unregulated loans they are writing.

Anderson said: "All lenders have to be careful about who they are lending to and the quality of deals they approve – something we take very seriously. But demanding an inside trouser leg measurement from professional property developers risks undermining the value short-term finance can offer.

"Speed has always been critical in bridging and if you have the experience and correct market knowledge, underwriting does not have to be so tick box and lengthy. Just because it isn't tick box doesn't mean it isn't good quality. There seems to be a perception that weeks of underwriting mean a lender has done a better job. That's not how we see it - after 25 years in the market we know how to underwrite a loan quickly and properly.”