Alternative finance came to the mainstream during COVID-19
Paresh Raja is CEO of Market Financial Solutions
The impact of the COVID-19 pandemic on the property market cannot be understated. The sector, which has been a persistent success story for the UK economy for many years, has again been one of the strongest performers over the past 18 months; where others were felled, real estate flourished.
It should not, however, be forgotten that the property market faced challenges like any other, particularly in the months immediately following the onset of the virus. Most striking was the challenge of the real estate sector to adapt to balancing social distancing restrictions against the necessity of viewing and moving properties – during the three months of the first lockdown, this was essentially illegal.
While estate agents were negotiating the transformation of their sector to a digital-first offering, numerous other factors emerged as obstacles to property purchases and the health of the market. Critically, the difficulty of obtaining a wet signature on documentation became a substantial burden on the ability to close transactions – it took HM Land Registry until late July 2020 to announce it would begin to accept witnessed electronic signatures.
The economic uncertainty also led to unusual caution from mainstream lenders, with analysis revealing a sharp reduction in the availability of basic mortgage products.
This is where the opportunity opened for alternative finance, including bridging loans, to demonstrate its worth to a much larger audience – and in my view, with notable success.
Bridging loans demonstrate value
According to data from the Association of Short-Term Lenders (ASTL), there was a 25.7% year-on-year increase in volume of applications for bridging loan products in Q3 2020. This trend not only sustained, but grew as the SDLT holiday gathered momentum – by Q4, the year-on-year rise had reached 39.1%.
Evidently, along with the surge in buyer demand came a significant rise in interest in short-term finance product. It is worth considering why.
A study conducted by Trussle found that the average time it takes for a traditional lender to approve a mortgage product nearly tripled over the course of 2020, from eight days to 22. This figure reflects only the time elapsed between application and approval of the loan, and does not include its deployment.
Given the rush among buyers to take advantage of the limited SDLT holiday window, such delays in securing the necessary finance proved highly damaging. Conversely, alternative finance such as bridging loans can be deployed in a matter of days, affording buyers confidence in their market activities.
This is a critical point when considering both buyers and sellers. The ferocity of the market, and regularity with which property changed hands, only exacerbated the ever-present issue of protracted chains. Every delay from one buyer or seller put other transactions at risk – access to fast, reliable finance has become more important than ever during the pandemic.
Indeed, the flexibility of alternative finance providers offered a way for some buyers to take advantage of the SDLT, whether that was to expand an investment portfolio, get on the ladder, or move up it.
As with the property sector itself, we now find ourselves in an intriguing time to observe the alternative finance market. Certainly, there are signs that traditional lenders and consumers are returning to their pre-pandemic levels of confidence – it may be the case that we see a rejuvenation of the ‘high street’ lenders’ mortgage products, which largely fell off the market in response to COVID-19. It can also be credibly argued that the lapsing of the SDLT holiday will inevitably lead to a downward correction in demand, activity, and price levels.
With that being said, it is my view that alternative finance is in a healthy position following its pandemic-era mainstreaming. The unique circumstances of the past 18 months certainly afforded bridging loans an opportunity to demonstrate their value as a more flexible and bespoke product – as such, there should be broad optimism for the sustainability of the boom in interest.