News & Views

Buy-to-let boost is driving a surge in bridging

Brokers urged to take two bites at the cherry and consider bridging pre-buy-to-let. Brokers are missing a trick and turning away potential buy-to-let clients because the property they want to borrow against is unmortgageable. Bridging lender Fincorp says buy-to-let is increasingly the exit for short-term finance with a growing proportion of borrowers taking a bridge to fund refurbishment projects before remortgaging onto a traditional buy-to-let product and letting their property out.

In the past Fincorp says the majority of its borrowers used short-term funding to finance property development projects ending with a property sale.

But this balance is now shifting with a much stronger demand coming from property investors and landlords as well as property developers.

The latest figures from the Council of Mortgage Lenders revealed that overall for 2013 buy-to-let gross lending totalled 160,900 loans, up 23% compared to 2012. These loans totalled in value £20.7 billion, which was an increase of 32% compared to 2012.

Of this, the total buy-to-let lending for house purchase was 82,930 loans, an increase of 19% compared to 2012, and the total value of these loans was £9.3 billion, a 26% increase compared to 2012.

Buy-to-let remortgage lending showed the highest proportional buy-to-let growth, an increase of 29% compared to 2012 bringing the total to 76,260 loans. The loans valued at £10.6bn in total, an increase of 39% compared to 2012.

Matthew Anderson, director at Fincorp, says: “The bridging market has changed a lot in the past five years and we’re seeing more and more of our clients use buy-to-let as their exit from a short-term loan. The CML’s buy-to-let figures show a strong recovery in that market and we’re convinced that bridging is partly responsible.”

Anderson believes there has been something of a “perfect storm” with money markets starting to move again, freeing up funding for buy-to-let lenders themselves.

And with a strong house price recovery – particularly in London and the south east – there is a distinct trend up the buy-to-let risk curve with loan to values creeping back up.

Already 2014 has seen several key moves in the buy-to-let market that bode well for the coming year. Specialist buy-to-let lender Paragon Mortgages said in its latest results it saw an increase in mortgage lending of 207% during 2013, lending a total of £140.2 million.

Criteria and the number of products is also improving. Mortgage Trust, part of Paragon, has recently relaunched 80% loan to value deals on fixed rate and tracker buy-to-let products marking a significant upturn in confidence.

And in early February Post Office returned to the buy-to-let market after sitting out for more than two years.

But the shortage of quality housing stock on the market is no secret. RICS January Residential Market Survey said a shortage of homes coming onto the nation’s housing market is seriously hampering growth and pushing prices higher in many parts of the country.

This is where Fincorp believes bridging can be a critical link.

“There’s a lot of housing stock on the market that doesn’t match up to the standards buy-to-let lenders require – maybe there’s no bathroom or the property lacks a proper kitchen for example,” explains Anderson.

“This will put a black mark against it when the lender is underwriting a deal and landlords can find themselves being rejected for a traditional buy-to-let loan. But brokers can really help if a client finds themselves in this situation – short-term finance is the ideal solution for this sort of project. Once the refurbishment is done clients can then remortgage off the bridge onto a buy-to-let loan.”

Anderson says the advantage of that is also that usually the value of the property goes up after the work has been done meaning clients can get a better deal on their buy-to-let loan as the loan to value drops.

And he adds: “Brokers get two bites at the cherry as well, earning a proc fee for both loans.”

Fincorp also says the trend is likely to continue with a rampant buy-to-let market likely to send the bridging sector into overdrive in 2014.

Recent research from BM Solutions and BDRC’s Continental Landlord Panel suggests a third of landlords are looking to expand their rental portfolios in the next 12 months.

Anderson says: “While no one is quite sure of the overall size of the bridging market, it is without doubt increasing. We are busier than ever and expect the improvement in the buy-to-let sector to support further growth in 2014.”

FCA will regulate second charge loans like first charge mortgages

The Financial Conduct Authority is likely to crack down hard on second charge lending over the next two years after supervision of the sector moves under its jurisdiction in April this year. Bridging lender Fincorp, which offers second charge loans currently, believes that April’s switchover of supervision powers from the Office of Fair Trading to the FCA is only the beginning of a much tighter regime for second charges.

Although the FCA has yet to release full details of its plans for the second charge industry, Fincorp says that eventually regulation of the second charge market will fall into the same bracket as first charge Mortgage Conduct of Business and could be subject to the Mortgage Market Review rules.

Responsibility for regulating second charge mortgages will transfer to the FCA alongside the wider transfer of consumer credit regulation on 1 April 2014. While practically speaking not much is expected to change for brokers and lenders on this date, by April 2016 the FCA has said it hopes that all second charge firms will be fully authorised under a new regime.

This will lead to extra FCA fees and more compliance for those wishing to conduct second charge business in the future.

Nigel Alexander, director of Fincorp, said: “It may take the FCA a while to move the whole market from a Consumer Credit frame of working to a fully regulated one, especially since we haven’t yet seen its final decisions on how second charges will be dealt with from April, but I suspect over the next 18 months to two years secured loans will come to be treated exactly the same at first charges.”

Alexander believes that this move would “make perfect sense” given the risks posed to consumers who take second charge loans.

“In my opinion second charge loans should be regulated exactly the same way that first charges are,” said Alexander.

“It doesn’t seem right that borrowers have to go through very rigorous affordability checks and show their repayment method to get a 50% loan to value deal on a first charge but then have far fewer checks in place on the second charge loan.”

And he added: “In some cases second charges can take the debt to value ratio on a property up to 90% between the two loans but only part of the loan falls under the affordability rules in the Mortgage Market Review – it’s the same borrower and the same house. It just doesn’t seem right that this should be the case.”

Traditionally, second charge loans can be used by those who may have difficulty obtaining credit by other means and as such have often been sold to borrowers as a way to consolidate their debts.

But defaulting on a second charge loan can lead to possession of the borrower’s property which means the product is considered to be high risk under the OFT’s approach to regulation and which Fincorp thinks will be a red flag for the FCA after April.

Alexander added: “I should think the FCA will be particularly interested in making sure lenders and brokers offering second charge loans are just as careful and rigorous about who they lend to as mainstream mortgage lenders are. Particularly as borrowers who overstretch themselves run the risk of losing the roof over their head. I’d guess that this will come in the format of the same affordability checks as first charge lenders have to use in MMR.”

The latest statistics from the Finance and Leasing Association show that last year saw a strong performance in the second charge mortgage market with gross lending rising 37% to £445 million.

Figures from the OFT show at their peak in 2006, new advances in the second charge market were estimated at approximately £7 billion. In 2008 they were closer to £3 billion with average loan sizes around the £20,000 mark.