ASTL: Beware moving up the risk scale
Benson Hersch is CEO of the Association of Short Term Lenders
The bridging market has become increasingly crowded over the past few years. With more and more lenders competing for customers we are at a situation where sometimes there are more funds available than there are borrowers needing them.
The consequence of this has been the lowering of bridging interest rates, a rise in LTVs in some areas and an increase in diversification.
The lowering of rates is definitely a good thing for borrowers and for the reputation of the bridging industry. Rates will always be higher than on mainstream mortgages, but bridging is an enabling tool, and rates are not the deciding factor when bridging is considered. A broker can justify recommending a bridging loan for the value that it will bring to the customer, who can take advantage of a profitable opportunity, or satisfy a short-term cash flow requirement.
A more crowded bridging market has also meant increased diversification. Some loan durations have extended well beyond the traditional six-month to one-year bridge. A number of lenders now offer the possibility of migrating bridging to longer-term loans. Other lenders have tweaked their offering to be more attractive for different audiences who may not in the past even have been aware of bridging.
A positive development over the past few years has been the use of short-term loans for business purposes. A growing number of companies now utilise the speed of getting a short-term bridging loan to take advantage of a business deal or acquisition opportunity. These usually need a quick injection while longer-term finance is arranged.
The other key evolution has been into development finance. Traditionally this has been considered much riskier; so only a few lenders would touch it.
Today this move up the risk curve is interesting. The move is good if lenders have experienced people who really understand the world of development and how it is different to, say, a loan for refurbishment.
A development loan, where the purpose is for building from the ground up, means that the unwary lender is at risk of losing their money with nothing left to repossess other than a building site.
A similar situation would occur where a property is subject to major changes, where substantial costs would need to be incurred to render the property saleable or mortgageable. Other less welcome moves up the risk scale include increasing of LTVs.
There may be occasions when this is absolutely the right thing to do for an individual borrower with a very good exit route. Raising LTVs across the board however, can leave a lender exposed in the case of default.
The other area around which there has been much discussion is rebridging. Again, there are circumstances where this is viable, but where there is no clear exit route other than another bridge this can become a dangerous game of “pass the parcel” where the lender holding the parcel when the music stops is likely to get their fingers burnt.
Changes, developments and diversification are vital in a competitive market place. Positive innovation will add to the sector, giving it more colour and life and making it more viable. Gaining a competitive advantage just by moving up the risk scale without proper analysis of what will happen if the loan is not paid back however, can lead to disaster if not done with the right due diligence.
Bridging is continuing to grow, but it will have its ups and downs in the year ahead. The lenders who will still be going strong will be those who balance innovation with an element of caution and a healthy dose of due diligence.