According to recent figures from the Association of Short Term Lenders, the number of bridging loans written in the first quarter of 2016 continued to rise. This increase in bridging lending activity is the result of more investors opting to secure short-term loans to finance property deals, highlighting how this type of finance is continuing to outstrip the mortgage market.
Bridging finance is being used for a number of purposes.
However, continued delays in obtaining high street finance for a long-term mortgage is worryingly still the main reason for borrowers accessing bridging finance, while refurbishment is a close second. These valuation and legal delays are essentially causing needless cost for borrowers, the latter being the largest contributor to delayed completions, emphasising the all-important issue of timing.
In my opinion, a panel of solicitors who are experienced in bridging finance should be made available to borrowers as an option, rather than a conveyancer who has never dealt with a bridging loan, highlighting how specialist knowledge is absolutely vital.
Why then is it still taking such a long time for mainstream mortgages to complete, even though the vast majority of the process is now automated and reliant upon technology? By comparison, bridging is known for speed, yet in the main, the process is still very much manual, with very little reliance on IT and automation. In fact, in most cases, each loan is underwritten individually on a case by case basis, with lending decisions based on factors such as loan-to-value and are more focused (in the main) on the property asset and less focused on the borrower. Of course the latter refers to non-regulated transactions.
However, even regulated bridging loans complete faster than main stream mortgage loans, which is why borrowers are increasingly turning to bridging finance when faced with mortgage delays. I believe that one of the reasons is because even for regulated bridging loans, interest is generally rolled-up, without the client having to service the debt with monthly repayments. Therefore, there is less onus on affordability assessment.
With interest rolled-up, the borrower repays the principle capital sum borrowed, plus interest and any fees capitalised on the loan, when they redeem. This is why in most cases the exit route is vital to any bridging deal and why the lender will consider how achievable it is for the borrower to obtain a mortgage to refinance the debt. Where exit is via sale, there is obviously not the need to assess income and the client’s ability to refinance the debt.
This flexibility means bridging loans are often completed in a much shorter timeframe. This coupled with faster SLA’s with third parties involved, such as solicitors and surveyors, who all turn around work faster for bridging than mortgage finance, are the main reasons why it can complete faster.
Therefore, the bridging sector is expanding significantly faster than the mainstream mortgage market and, as a result, it is not surprising that the short-term finance is becoming increasingly relied upon. However, despite this, the bridging finance market is still estimated to account for approximately 1.5% of the overall property transactions that complete each year.
It is clear that the short-term finance market which continues to grow and strive in innovation is good news for mortgage intermediaries and clients looking for specialist solutions. However, intermediaries must continue to inform and educate borrowers on how bridging is no longer a last resort solution, but a supple way of finding the best overall long term funding option.
Thanks to increasing volumes of business, flexibility, transparency and a greater awareness, bridging is gradually becoming more mainstream and, intermediaries that have never even considered bridging loans for their clients, will find it increasingly difficult to disregard.
The property market is fast-paced which means borrowers need rapid and flexible finance and, in short, continued delays in mortgage completions from high street lenders has contributed to the increase in borrowers accessing bridging loans.