Bridging loan books grew to a record £4.62 billion at the end of the second quarter of this year, according to the Association of Short-Term Lenders (ASTL).
This represents growth of 11.7% compared to the first quarter of the year and an increase of 14.4% on the same quarter in 2018.
Bridging loan applications also hit a record total in the 12 months preceding the end of Q2 2019, with £22.13 billion of applications representing a 9.7% increase on the same period the previous year.
The figures were compiled by auditors from data provided by members of ASTL, which confirmed that more than £1 billion of bridging loans were written in the second quarter of this year, an increase of 11.8% on the previous quarter and a rise of 4.1% on the same period last year.
There were £5.69 billion of bridging loan applications in Q2 2019, which is 4% lower than the first quarter of the year but 5.3% more than the same period in 2018.
Benson Hersch, CEO of the ASTL, said: “The second quarter of this year has delivered some very strong results for bridging lending, with record values both for applications over a 12-month period and total outstanding loan books. In fact, nearly all measures were higher than last quarter and the same period in 2018.
“The wider political and economic environment remains uncertain and the challenge for the industry now is to continue this level of activity whilst maintaining high standards of underwriting and customer focus.”
Bridging loans have become increasingly popular amongst property investors keen to expand their portfolios, new data has revealed.
The latest ‘Bridging Trends’ report revealed for the second consecutive quarter, this type of finance was most commonly used to purchase investment property.
According to the data it contributed to 25% of all lending during Q2 2019, up from 22% in the first quarter of the year.
According to the businesses compiling the data, bridging finance was being used by property investors who needed to move swiftly to capitalise on opportunities while prices were low.
Kit Thompson, director of short term lending and development at Brightstar Financial, said: “There continue to be opportunities for property investors to grow and diversify their portfolio and bridging finance provides a fast and flexible form of funding that enables them to leverage their capital and make the most of these opportunities.
“This is a trend we expect to see continuing well into the future.”
Other uses for bridging
According to the report, a traditional chain break was the second most popular use for bridging finance in the second quarter – this contributed to 18% of lending.
Borrowers were also using bridging loans for business purposes – this area of lending went up from 12% in the first quarter to 18% in Q2.
Dale Jannels, MD, at impact Specialist Finance, said: “I’m not surprised that chain break finance was the second most popular reason for obtaining bridging finance in the last quarter.
“We’re in uncertain times and this uncertainty transfers into property transactions also.
“Customers are also being gazumped and looking for short-term finance assistance to speed up the purchase of their dream property. Add in the complexity of many property transactions and the high-street lender will say no, yet short-term finance might get them over the initial line.”
Impact Specialist Finance and Brighstar Financial are among a number of businesses which provide figures for the Bridging Trends report. The others are MT Finance, Clever Lending, Complete FS, Enness, Positive Lending, Pure Commercial Finance, Y3S, and UK Property Finance.
According to the report bridging growth stabilised in the second quarter, with bridging loan volume transacted by contributors hitting £184.82 million, a £500,000 decrease on the previous quarter (£185.32m).
Average LTV levels increased by 1.55% in the second quarter to 52.85%. The average monthly interest rate in Q2 was 0.79%, representing an increase of 0.05% on the previous quarter.
The number of regulated loans transacted by Bridging Trends contributors decreased from 38.3% in Q1 2019 to 37.5% in Q2 2019.
Second charge loan transactions, meanwhile, saw a slight increase in Q2, up from 18.3% in the previous quarter, to 18.7%.
The average term of a bridging loan remained at 12 months while the typical completion time on a bridging loan application in the second quarter increased by four days to 44.
Gareth Lewis, commercial director at MT Finance said: “Now that Boris Johnson has been announced as the new PM and has made Brexit top of his to-do list, this should help give the market the certainty it needs.
“If the rumours of a stamp duty overhaul are true, we expect the change to ease the pressures of regulation and excessive taxation on UK property investors. It will be interesting to see what happens over the coming months, but hopefully the sector can look forward to buoyant growth.”
When utilised properly, bridging loans are among the most effective commercial finance products. We try to answer a few burning questions about such loans in this post.
If you operate in the property market, you already know that time is of utmost importance. A good deal can become unreasonably expensive if you can’t close it in time. Worse yet, someone else is almost always ready to swoop in and steal the deal from you.
In short, if you can’t move at a rapid pace, you’ll only make things difficult for you.
But then again, it’s never easy to get property deals worth hundreds of thousands of pounds through without having some time to think, consult with people and arrange for funds. The last part – that of raising money – eventually turns out to be the bottleneck.
Breaking that bottleneck so that investors, developers, landlords and regular buyers can ‘realise’ their dream deals is the prime focus of all bridging finance products.
Before We Start – A Quick Look At What Bridging Finance Really Means
There are quite a few myths that regularly float around bridging loans, especially amongst first-time borrowers. For now, we will just try to clear the air by defining what bridging loans are.
What Are Bridging Loans?
Bridging loans are short-term loans taken (usually) by commercial entities to help ‘bridge’ the gap between required funding and available (or soon to be available) funding.
It’s common for people in the property market to use the terms ‘bridging loans’ and ‘short-term loans’ interchangeably – but that’s not always correct. An easier way to differentiate between the two is this: all bridging loans are short-term loans, but not all short-term loans are bridging loans.
Let’s say you are a property developer. You already have an active project that’s nearing completion. You expect it to complete within next 10 months. For now, you’ve come across a good buy to let opportunity that you don’t want to miss out on. The only problem is, the seller wants you to make an initial deposit of £200,000. You already have active development finance on your project, so you know it’ll be tough to get a buy to let loan.
In this case, a bridging loan can be the most ideal way out. You can, for instance, take a six-month bridging loan with a fixed interest rate. This loan will cover the initial deposit for your new project – and can be paid back once the active project gets completed (i.e. your exit strategy will hinge on the competition of your active project).
Here’s how the numbers would typically work out for such a case:
The market value of the property to be used as security: £400,000
Maximum LTV offered by the lender: 80%
Maximum amount that can be borrowed: £320,000
Actual amount borrowed: £250,000
Initial deposit to be made: £50,000
Balance bridging loan amount: £200,000
Applicable interest rate:5% per month
Loan term: 12 months
Payable interest: £1,250 per month
Why Are Bridging Loans Used? Who Are They Aimed At?
There’s really no limit to the number of reasons people and businesses use bridging loans for.
Even though, at Commercial Finance Network, our bridging finance services focus on the property market, it’s important to note that bridging loans are used across all industries and sectors. They may take different names and forms, but the idea remains the same.
Bridging loans are aimed at people who are looking to enter the property market via any of the regular channels (buy to let, convert, develop or invest). Essentially, if you are a property developer, landlord or investor, you can and should use bridging loans as a viable financing option.
Fast: There’s no need to waste time. When you work with an industry-leading whole of market broker like Commercial Finance Network, you get a decision on your bridging loan application within 24 hours. More importantly, we make sure that the lender releases the funds to you swiftly.
Flexible: Bridging finance is incredibly flexible. It’s just a short-term loan, but can well be extended up to 12 months, should you feel the need to. Moreover, most lenders are willing to offer interest-only repayments (subject to the viability of your exit strategy).
Cheap: Bridging loans we broker come with lower-than-market interest rates. Some of our lenders offer interest rates as low as 4% per month. It should, however, be noted that bridging finance is more expensive than long-term mortgages.
When Should You Consider Applying For A Bridging Loan?
Bridging loans are a specialty commercial finance product. Therefore, to make the most of what they have to offer, you need to know and understand when they are a good option.
Here are some common scenarios that are tailor-made for bridging loans:
Buy To Let Projects
Buy to let projects are well served by bridging loans – especially when your existent credit line/loan is fully invested in another active project.
Residential/Commercial/Mixed Use Development
Development projects, more often than not, end up stretching your budget too thin. There are a million fronts to fight on, and it’s not at all uncommon for developers to run out of money. Such situations – before the project starts or is already in progress – can be taken care of using a customised bridging loan.
If you want to undertake conversion/refurbishment projects, you can take out a bridging loan to cover the costs.
Important: Know What Your Exit Strategy Is!
Bridging loans are incredibly useful when your back is against the wall. That, however, doesn’t mean that they can replace conventional, long-term financing options.
A bridging loan is best viewed as a temporary arrangement – one that saves the day.
Therefore, before you get into a bridging loan contract, it’s important for you to know how you’re going to exit. Common exit strategies include:
Selling the property (being used as security)
Getting a more robust, long-term development finance package or buy to let loan
Placing a mortgage on your new property
Bridging Loans Timeline
A traditional mortgage would take weeks to ‘realise’. Bridging loans, thankfully, are faster.
When you work with us, we make sure that you get a decision from lenders within 24 hours. Once you decide to go ahead with a particular quote, the lender will proceed with the valuation of your property and assessment of your credit file. Everything said and done, a commercial bridging loan can go through within a matter of days.
Finally, How To Apply For A Bridging Loan?
If you don’t want to involve a broker in the process, you can approach lenders directly. This, however, is an approach fraught with risks. When you aren’t familiar with the lender’s approval criteria, you always have a very high chance of getting multiple applications turned down. This puts a dent in your credit score, making it even more difficult for you to get approved.
Such hassle can be avoided with ease, and for a very reasonable cost by working with a leading whole of market broker like Commercial Finance Network. We have on board a panel of UK-wide specialist lenders who are known to offer low interest rates and high flexibility of repayment.
Applying for a bridging loan is easy – just complete this form or call us on 03303 112 646 to get started.
A law firm is warning bridging lenders of the dangers of procuring legal or surveying services on the basis of price alone, after it emerged many were compromising on due diligence to cut costs.
The alert comes following a study by Brightstone Law, in which it identified a trend where new lenders in the market were seeking to drive down fees by procuring professionals based simply on price.
The law firm said while this might work commercially, on a superficial level it could potentially be damaging to lenders further down the loan journey.
Indeed, it warned a law firm or surveyor employed simply on price might not have the right knowledge, skills and experiences to handle issues and complications which might arise in short-term loans.
And it raised concerns if one of these firms were asked to provide less than a comprehensive service, a so-called lite version, which was appropriately priced, it could end up being delivered by a less senior staff member.
Jonathan Newman, senior partner at Brightstone Law said: “For the first time in all my years of practice, too many to mention, my firm is turning away new custom. The reason is not lack of capacity. Far from it. The teams and practice continue to grow to meet demand.
“Many of these new lenders don’t have the benefit of past experience, or may have erased from their memories, the hard lessons taught in the last recession. These potential new clients appear to have a fixation on price and an appetite for the dilution of service requirements – professional services lite.”
Bridging market evolution
The bridging market – along with the accompanying legislation and regulation – has evolved over the past few years, which Brightstone Law said had led to the creation of more complex challenges.
Meanwhile, the responsibility of firms to deal with their own regulatory issues such as anti-money laundering, GDPR and cybercrime created additional layers of red tape.
This, said Brightstone Law, meant more sophisticated and reliable support was required – but this came at a cost.
Newman added: “In today’s market, these considerations should not outweigh a requirement for the right professional resource, to deliver the right professional job, comprehensively and thoroughly. I hear much about lenders and this risk curve – but those discussions centre on riskier lending, not on watered down, professional relationships.
“More now than ever before, lenders need the right professional partners to protect them, in a market where the pressure is to be flexible and commercial; where the classes of lending are trickier; and where levels of default and areas of dispute remain more common, than in the mainstream mortgage market.
“Lenders need to balance their appetite for greater distribution share, with minimising risk, not by indirectly and unconsciously increasing it.”
Bridging lending has fallen slightly during the first quarter of the year but strong competition and signs of average loan size increases indicate a market which is on an ‘upward trajectory’.
That’s according to the latest figures from West One which has released its Bridging Index showing gross annual bridging lending reached £5.5 billion in Q1 2019.
This was a slight decrease of 2.6% on the previous quarter, which yielded a high of £5.7 billion. But West One said it was always going to be challenging to maintain this powerful growth trajectory.
What’s more, according to its estimates, the average loan size increased by 11% through the quarter, compared to Q4 2018, which was the highest performing quarter of last year.
As well as releasing lending figures, the West One Bridging Index also analysed trends within the market. It said competition had been maintained thanks, in part, to the wealth of new bridging products to enter the market.
New ‘development exit’ loans to help builders transition from repaying their development facility to obtain the sales values they want to achieve have been created.
But West One said it had also noticed increasing demand for ‘bridge-to-let’ products, which enable landlords hit by tax relief changes and affordability stress tests to bring derelict properties up to scratch to add to their portfolios.
West One’s data also revealed bridging finance interest rates had fallen to their lowest levels, with a Q1 average of 0.95% per month.
Factors contributing to this included a stable Bank of England base rate, strong market competition and the continued interest from new entrants combined with well-funded players maintaining attractive rates.
West One said the fall in rates was also driven by the increase in regulated bridging that was priced at a lower rate of interest. This, it explained, had meant good value for borrowers, resulting in the continuing interest and performance of the sector.
Stephen Wasserman, managing director, West One Loans: “At West One, we’ve seen robust growth in our bridging service this year, which includes completing one of our largest loans.
He added: “It is positive to see the average loan size increase, too. With the ASTL reporting a record number of applications among their membership, it’s clear that bridging finance is still very much on an upward trajectory.”
Bridging loan applications totalled more than £5.96bn in the first quarter of this year, representing growth of 13.6% compared to Q4 2018 and an increase of 6.9% on the same quarter last year.
The Association of Short-Term Lenders (ASTL) found applications for the year ending March 2019 were £21.8bn.
Benson Hersch (pictured), chief executive of the ASTL, said: “The results for Q1 2019 were a mixed bag. For completions, this was the lowest result since Q3 2017.
“On the other hand, the loan book total is the highest since Q1 2018 and the applications were the highest ever. We would expect this high value of completions to result in improved completions in Q2 2019.”
Bridging lender loan books reached £4.14bn in Q1 2019, up 7.9% from Q4 2018, although slightly down on the same period last year.
The value of completions during Q1 2019 was £898.5m, representing a 13.1% decrease on the same period last year.
Included in the figure for bridging completions was £92m of development loans. In addition to this, ASTL members wrote a further £206.6m of non-bridging development loans, making a total of £236.9m.
Over the last few months property investors have been opting for longer-term bridging loans because of Brexit uncertainty, brokers and lenders alike have observed.
James Bloom, managing director of short-term lending at Masthaven Bank, said borrowers have been opting for longer-term bridging deals for more certainty by looking for 18-month non-regulated loans for both bridging and development.
He said: “Unfortunately because of the market exits take longer and if you exit the sale it’ll take longer to sell the property, so it’s inevitable the average length of the loan will increase in the market and you need products to match that. It’s a natural trend.”
James Hedges, a broker at Voltaire Financial, agreed and said that clients have been opting to take a longer-term bridge of around 18 to 24 months rather than the typical six to 12 months to give them a little bit more flexibility.
He added: “Clients typically are after a 12-month bridge because at the end of the loan they know they’ll be selling but with Brexit, they’ve been unsure whether it will be the right time to sell in 12 months’ time and don’t know where they’ll be, so they’re opting for longer-term bridges.”
Hedges pointed to the example of a deal on an office building where the client wanted a bridge to sell in six months’ time. However he opted for a longer-term bridge for more certainty because he was worried about the market collapsing, while he was also anxious his tenants could leave the office building and he’d struggle to replace them.
Hedges said: “But I think he’ll be fine because its well-located and everyone’s desperate for office space.
“There’s been a few deals where you typically get the shortest deal possible for the client because they typically just want some cash and then to sell the property, but clients are now looking for more certainty.”
Payam Azadi, director of brokerage Niche Advice, has seen the same trend but doesn’t think borrowers should be going for long-term bridging loans ideally.
He said that if a client wants a 70% loan-to-value bridge a lot of the costs gets added to the loan and if they’re servicing it and choose a 24-month term after the interest is paid they actually end up with a 50% LTV deal.
Azadi added: “We’re seeing clients look for longer terms but this could impact on how they service the loan.
“A longer-term only really works if a client is prepared to service a loan. Most clients I’ve come across don’t want to service it. And the exit strategy will impact on what people want too.
“When a borrower takes out a bridge and after six months can’t sell it, they shouldn’t look at keeping it for another six months. They should look to flip it into a buy-to-let or if they want to keep it, a longer-term bridge might be useful.
“But as a set rule bridging is supposed to be a short-term solution and there’s innovative ways you can look to meet the client’s needs without necessarily sitting on an 18-month bridge.”
Rebridging will define 2019, as mainstream bridging lenders are likely to get nervous about extending deals, Chris Oatway, founder and director of LDNfinance, has predicted.
He said that mainstream lenders may want to do less rebridging this year as no one wants to keep rebridging a deal multiple times, leaving room for others to step in. He also pointed to bridge to sell as another growth area.
Oatway (pictured) said: “There’s been a lot of rebridging over the last couple of years, increasing month-on-month. We still see there being a massive market for rebridging. The year of the rebridge is still ahead.
“Rebridging and bridge to sell will be strong this year due to the slow market. Every deal is taking longer to go through so I can see both of these areas growing.
“The mainstream lenders won’t stop rebridging but I think they’ll get more nervous in that area, spending more time assessing the deal, making a decision and not saying yes to everything like they may have been doing before.
“However, that section of the market will still be serviced by other lenders. There’s so many options you can have for bridging finance that no matter what the requirement is, whether rebridging or bridge to let, it will be serviced because there’s enough people out there to cater for it.”
Oatway said you just have to know who to speak to make sure you can get these rebridging deals done and he’s seen a lot of distressed sales with auction deals where people want to get out of it quickly, pre and post Brexit.
Oatway added: “Auction purchases will also remain strong but are not likely to significantly increase, in proportion to the bridging market, unless there is a hard Brexit and a big knock-on effect.”
The ongoing uncertainty around the UK’s scheduled departure from the EU has epitomised an environment in which we have had to learn to expect the unexpected, which is not an ideal situation for lenders or advisers.
As we approached the end of last year, in the short-term lending market we were greeted with the news that Amicus Finance had entered administration, which, combined with the environment of uncertainty, has led to questions in some quarters about the future health of the sector.
With this in mind, it is useful to take a step back from the noise, to review the role the market has played in the past and to take an objective view of current challenges.
Evolution of sector
When the 2008 credit crisis hit the UK property market it was important for alternative finance to fill the gap left by the mainstream mortgage sector, and short-term lending became more significant for customers as it provided the flexibility they needed to achieve their objectives.
The Association of Short Term Lenders was set up in March 2008, initially with 19 members, with the dual objectives of protecting the reputation of the sector and providing a voice for lenders involved in bridging and secured lending for terms of between six months and two years.
The role of the ASTL has been to promote responsible lending, transparency and professionalism in the bridging finance sector, with members subscribing to our code of conduct, membership rules and value charter.
And we have achieved a lot over the past decade, growing our membership to more than 60 and developing an increasing influence with various bodies including the Financial Conduct Authority, the National Association of Commercial Finance Brokers, Association of Bridging Finance Professionals and HM Treasury.
The lending landscape has also changed significantly over this decade. More institutions have spotted the opportunity and new lenders have entered the market, increasing the options available for borrowers.
Competition is important for any market. Not only does it provide customer choice, but a larger number of players can raise awareness of the product and stimulate demand.
We have certainly seen new entrants into the bridging sector helping to spread the message about short-term lending as a flexible funding solution and there has been increased understanding about uses for bridging among intermediaries and consumers.
Those consumers have also benefited from another consequence of increased competition, with greater availability and lower pricing. But these benefits for consumers also provide a challenge to lenders.
A report by EY into the bridging market found that three key trends have emerged as a result of increased competition, with lenders experiencing margin compression, stretching to higher loan-to-value ratios and introducing more flexible product terms and features.
It is important for any lender to manage these risk factors, but amidst an environment of high competition and some significant economic challenges, it is important for bridging lenders to be cognisant about balancing their appetite for market share with taking on excessive risk. Failure to appropriately manage this risk can lead to casualties, as we have seen.
There are undoubted economic challenges ahead. The OECD’s stable forecast for the UK is based on the assumption that there is a smooth exit from the EU – and this is looking increasingly unlikely.
The OECD says failure to come to a withdrawal agreement with the EU is by far the greatest risk in the short term, suggesting that a no-deal scenario could subtract more than 2 per cent from real GDP over two years, and elsewhere, media speculation makes the OECD outlook appear decidedly positive, with the papers full of gloomy predictions.
Brexit is not the only risk ahead. There are many indications the global economy has passed its peak in the cycle and there have been signs of volatility in markets across the world.
It is also widely expected that there will be a property price crash in Australia, with recent data from CoreLogic confirming house prices have fallen the most in a single quarter since 2008.
History tells us the world can be a small place when it comes to economic contagion, and if banks suffer losses in Australia, they may become more risk averse in other regions.
In addition, we do not know the impact the UK’s growing mountain of debt will have during a downturn.
The country’s total debt is projected to reach £6.7tn by 2023, with households accounting for £2.6tn of that, a larger share than both the government and non-financial companies, according to analysis byPWC.
There are certainly challenges, but there remains opportunity among the danger, and perhaps reason for cautious optimism about the sector.
The unemployment rate is historically low and real average earnings have risen. These are strong economic foundations and, if the Brexit situation is resolved without inflicting significant damage to the economy, there is potential for a bounce-back.
The OECD says Brexit-related uncertainties have held back economic growth since the referendum in 2016 and so any positive outcome from negotiations could lead to stronger than anticipated results.
The key for short-term lenders is to proceed with care. Companies need to invest in people to ensure the threat of skills shortage is mitigated and to have confidence in the decisions employees make.
They also need to invest in technology to help deliver this peace of mind, so that skilled people have reliable data to work with, and information-gathering needs to be improved.
This is why it is so important that, as an industry, we are able to put aside commercial differences and come together to share expertise and best practice.
Increased competition among bridging lenders can grow our market and increase opportunity for everyone, but it also comes with risks, particularly in such an uncertain environment.
By working together we can help to identify those risks and agree a shared approach to mitigate them.
Developing this approach of mutually beneficial co-operation will be a key focus for the ASTL in 2019.
With a cautious approach and the ability to share and adapt, we believe the bridging sector will emerge from the uncertainty with greater resilience and more opportunity.
By Benson Hersch, chief executive of the Association of Short Term Lenders
There’s been a surge of short-term lenders entering the market over the last 12 months, up by 50% on 2017, Brightone Law has found.
Short-term lending transactions are also up 15% year-on-year.
Recent figures from the Association of Short-Term Lenders (ASTL) also show that bridging lending amongst its members rose by 15% in 2018. The value of applications have also increased, up by 13.4% to nearly £21.5bn and total loan books increased by 3.6%.
Jonathan Newman, (pictured) senior partner at Brightstone Law, said: “Despite Brexit and slowing house prices, the industry has remained resilient.
“The current economic and property market conditions do not seem to have adversely affected transactional volumes, or the appetites of lenders to fund over the market as a whole.
“Whilst some lenders have applied greater caution in underwriting, others have seized the opportunity to gain a foothold.
“Short-term commercial lending is regarded as the last area of unregulated lending, and therefore relatively quick and easy to set up to lend and open to all.
“With the current climate amongst institutional lenders remaining cool and processes viewed as tiresome, labour intensive and unsatisfactory, significant volumes of finance are being redirected into the short-term lending space.”
Newman added: “We are also seeing a loosening of lending criteria and increased flexibility from new lenders entering the market. These new entrants are driven, passionate and have a willingness to adapt and innovate. They will disrupt the market, just like the first wave of challengers did 10 years ago.
“However, what is deeply concerning is that some of these new lenders lack experience and so have the potential of being exposed to poorly non-performing customers, or unsuitable security.
“Many of these new players are unable to identify future problems and may not have the personal know-how, gained from experience, to deal with problem issues in an effective and sensible way.
“However, they can reduce some of those risks by tapping into the experience of professional partners for support.”
Newman said that selection of key professional partners is all-important to securing a successful start.
He said: “Cost is a factor in that selection process but should not be the sole one.Hence selection of key partners is vital.
“Valuers with longstanding experience of market volatility, but with particular experience of the chosen asset class; intermediaries that introduce, but who are active in the wider finance market, and who understand the borrower and maintain the relationship to contribute and participate in the exit too; solicitors who have the technical competence and process to transact the property side competently and securely, but with transactional experience, knowing what can and sometimes does go wrong further down the timeline, and how to deal with that; solicitors that do not just identify issues but are capable of offering solutions.
“Brightstone Law has a well-established reputation for short term finance transactions and recovery I take great pride from the longevity of our lender client relationships.
“So many of our clients were once those disruptor new boys on the block and now, are established, key players, leading brands and the benchmark for new entrants. To have played a role in their growth and success is truly satisfying from our perspective.”