Bridging can benefit from the changing landlord market
The bridging market enjoyed a terrific start to 2016. The latest figures from the Association of Short Term Lenders (ASTL) have revealed that in the year to 31 March, members of the trade body – which includes LendInvest – increased their lending volumes by 16% year-on-year.
The value of those loans were up by even more, with a 20% rise to a total of £2.7bn, according to the ASTL.
So why did the market see such growth? One obvious answer here is Stamp Duty. With the 3% surcharge coming in for second and additional homes on 1 April, landlords rushed to get their purchases through ahead of that deadline. It’s no wonder that so many bridging lenders reported record months in the build up to the deadline. At LendInvest for example we completed more than £50m of bridging loans in March.
But Stamp Duty is only part of the story. Another significant factor is the growing reputation of bridging finance itself. The days of bridging loans being dismissed as ‘loans of last resort’ are long gone. The industry has worked incredibly hard to build a reputation for delivering a quality product and service, and that hard work is bearing fruit.
As the industry’s reputation has improved, more and more brokers, and their clients, have turned to bridging. Perhaps a deal came up that had to be completed quickly, ruling out a traditional buy-to-let mortgage. Or perhaps the property would not be approved for a traditional mortgage in its current condition – it has no bathroom, for example – but with a bit of refurb work could easily be flipped for a tidy profit.
With every good experience that these brokers and borrowers have of bridging, they are then more likely to come back the next time an opportunity presents itself.
Bridging finance remains a niche product; it absolutely isn’t for everyone. But it is more established today than it was even 12 months ago.
So after such a positive first quarter, where do we go from here? The bridging market today is a rather calmer and more cautious one than we saw just a few months ago. Obviously the passing of the Stamp Duty deadline is a factor here, but there is also the EU Referendum to consider. Many investors, particularly those looking at properties at the top end – a flat in Kensington, for example – are opting to wait and see what happens.
That’s understandable. Markets are not big fans of uncertainty. As such, rumours abound as to whether or not a vote to leave will dent the number of potential tenants, or whether activity will pick up once again as soon as the vote is over and the outcome is finally known, whichever way it goes.
There are many reasons to be optimistic. For months we’ve been subject to forecasts and predictions of the demise of property investing, as a result of the various government and regulatory changes which have made life harder for landlords, particularly the amateurs. But this demise is not being borne out in reality.
However, it is undeniable that the market is changing. A number of mainstream buy-to-let lenders have adjusted their minimum rental coverage requirements to 145% from 125%, including The Mortgage Works and Barclays.
As a result, bridging lenders have to be far more stringent in judging a borrower’s exit plan. Will they really be able to refinance to a buy-to-let mortgage? It’s crucial for lenders to not only judge a bridging deal on how it looks today, but also how it will look six to 12 months down the line when the borrower needs to exit the loan.
Like the products they offer, the best bridging lenders are nimble and adapt to changing climates. It’s time to shrug off the incumbent negativity and look forward to the rest of 2016 with a spring in our step.