In what has been a frenzied year for the property market as a whole, the bridging sector has had a particularly high uptake. The stamp duty holiday combined with pent-up demand from all the transactions that had been put on hold during lockdown to create intense competition, making the need for speed more important than ever.
However, according to bridging specialists, even though the tax break has finished the short-term lending market remains buoyant, and they expect this to continue in the months ahead.
For brokers who are less familiar with this niche area of lending, there are many scenarios in which it can prove the solution they need to get a client out of a tricky situation.
We can get a valuer out in 24 hours and a report back in less than 48 hours
Mortgage Strategy spoke to a number of specialist bridging brokers and lenders to find out the types of case coming across their desk.
Case variety
In fact, by the very nature of bridging it can be difficult to chart clear trends. Advisers who work predominantly in this area say it is rare to see two identical cases.
Often the reason for seeking a bridging loan in the first place is that the circumstances of the case are unusual and do not fit with high-street lenders’ cookie-cutter approach to underwriting. Analysis of searches for bridging loan criteria on Knowledge Bank tells something of the variety of situations advisers are dealing with.
There is nothing seasonal about the market anymore
In October, the top search terms were ‘regulated bridging’, ‘minimum loan amount’, ‘maximum loan-to-value’, ‘commercial property’ and ‘second charge loan’, while ‘heavy refurbishment’ and ‘adverse credit’ have also featured strongly.
First 4 Bridging operations director Donna Wells says: “We have seen a lot of buyers looking for bridging finance in order to break a chain. That is still happening but it is probably a backlog from the stamp duty holiday.
“We are also seeing lots of buyers borrowing to fund refurbishments, rather than looking for investment properties that are already done.
“Often the investors were hoping to get a buy-to-let [BTL] mortgage, but the property wasn’t ready. Lenders want to know there are tenants moving in imminently, but in these cases there could be six months’ work left to do on the property.”
First 4 Bridging sees a lot of cases where investors are looking for an exit from development finance.
Bridging finance has a place in both rising and falling markets
“Often the development has completed but with a delay, so the property hasn’t sold by the time the loan has to be paid back,” Wells explains. “We are seeing this with experienced developers; it is just that circumstances have held up completion.
“You also get cases where developers have finished a certain number of units and they want to raise capital against those to fund the next site.”
Auction purchases
Auctions have featured in the business mix recently.
Wells says: “We see people who are new to auctions and have gone in waving their hand in the air and then thought, ‘How am I going to pay for this?’
“We also have people who go to auction and buy an investment property, thinking it needs only new carpets and a lick of paint and then the BTL mortgage will be through. But actually it requires a lot more work.
“Then there are the experienced investors who go to auction and are aware from the beginning that they are not going to get funding in time, so they opt for bridging.”
Of course we want higher LTVs and lower rates, but for us it is also about reputation and our relationship with lenders
It is also common to see cases where a bridging lender has let down a client, leaving them in urgent need of finance, Wells adds.
“Sometimes lenders pull out at the last minute because they don’t like the property or the area.”
Like Wells, Market Financial Solutions executive director Tiba Raja is seeing a lot of cases where a previous bridging application has fallen through or is taking too long.
“We are definitely a lot busier than we were. Often that is the result of delays in other institutions. It is just taking a bit longer than they say.
“Also we see a lot of borrowers who have gone to other lenders and halfway through the process they’ve been let down.
“Sometimes this is because the lender doesn’t have enough funds. Other times it doesn’t have the appetite for risk, even though it says it does. It is only when the borrower goes further down the road that the lender decides the risk is not for them, which leaves the broker high and dry. That’s when they come to us.”
Although there is limited stock, professional investors can sniff out opportunities
For Raja, expert underwriting is the key to fast completions and good business decisions.
“We had a case complete recently within seven or eight days. We can get a valuer out within 24 hours and so we get a report back in less than 48 hours.
“We have experienced underwriters. If, for example, titles need to be broken down within a multi-unit block, a lot of people get stuck at the planning permission stage and they need a bridging loan to give them breathing space. Once they can sort out the titles and who owns what, they can get long-term finance quite easily. Our underwriters are very good at dealing with that kind of situation; speaking to lawyers and understanding the legal side of things.”
Crystal Specialist Finance group sales and marketing director Jason Berry agrees that experience of lenders is vital when selecting which one to use. He says there has been an influx of new entrants, as well as lenders that previously operated in other sectors and have moved into bridging, which has helped drive positive changes.
There is a maturity that exists with certain lenders that have operated in the bridging space for a while
“There is a lot of competition and that is great for driving down prices and increasing LTVs. We are seeing the most competitive pricing ever. Historically, rates have been around 0.75% per calendar month, but we are now in an environment where 0.45%–0.49% is commonplace.
“Arrangement fees have come down as well. Previously, they were around 3% or 4%, but now they are as low as 1% or 2%.”
However, while this competitive dynamic can be only positive for brokers and clients, it does not mean price is always the defining factor.
Berry says: “There is a maturity that exists with certain lenders that have operated in the bridging space for a while. With some new entrants we struggle to understand what their differentiators are, so they still have work to do to define themselves.
“But I think they will take a collaborative approach with brokers when shaping products so that customer outcomes just continue to get better.”
A lot of my investors are raising as much money as they can on existing portfolios and buying more properties
If Berry believes broker and customer demand will shape the lending landscape, what trends is he seeing? He says Crystal is handling a lot of rebridging cases.
“These are situations where there has been an issue meeting the exit from the existing lending facility. Some of that is an overspill from the pandemic because there was a slowdown of developments being completed. And now we have problems with the supply of building materials because of Brexit, so developers are struggling to meet their timelines.”
Planning rules
Changes to planning rules have also driven new business.
“We are starting to see the benefits of the permitted development rights,” says Berry.
Under these recent freedoms, property owners can build extra storeys and make other changes to buildings without having to apply for planning permission.
“Although there is limited stock, professional investors can sniff out opportunities. Many of them are coming to the market quite aggressively and they are seeing the chance to change the use of certain types of property,” adds Berry.
Impact Specialist Finance managing director Dale Jannels agrees that refurbishments are dominating the market.
We are starting to see the benefits of the permitted development rights
“It could be an investor taking a three-bedroom BTL and converting it into a five-bedroom HMO, with the aim of refinancing again in three to six months’ time and taking money out based on the increased value in the property and better rental yields.
“Or buying a very rundown property that is not habitable on day one, refurbishing and then refinancing it with a BTL mortgage to take some money out and also make some rental income — in other words, the best of both worlds.”
Acquisitive investors
Jannels says investors are extremely acquisitive in the current market.
“A lot of my investors are raising as much money as they can on existing portfolios and buying more properties, particularly in the North; anywhere from Peterborough upwards, where there is a decent university or college.”
Sometimes lenders pull out at the last minute because they don’t like the property or the area
Jannels welcomes the competitive conditions that new lenders create, but he is cautious about placing cases with a business without a track record.
“We have to be careful because it all depends on where its funding is coming from. If it is a one-off tranche of money and when it’s gone it’s gone, it may be having to wait for the next big loan to come back in first, before it can release any more cash. That is not helpful at all and we saw that a little while ago.”
Wells agrees: “Of course we want higher LTVs and lower rates, but for us it is also about reputation and our relationship with lenders to make sure we get the best service.
“It is not just about getting the cheapest rate for the client because those lenders can end up pulling out. If that happens, it is not likely to be the most cost-effective for the client because they may have paid for a valuation and started the legal process, and then they have no lending facility so they have to start all over again.”
We have seen a lot of buyers looking for bridging finance in order to break a chain
In terms of the future, most commentators are wary after the pandemic showed how much could change beyond all expectations within a short time. Following Covid and the stamp duty holiday, previous rules no longer seem to apply.
“There is nothing seasonal about the market anymore,” says Jannels, and Wells thinks the sector will remain busy.
“Bridging finance has a place in both rising and falling markets. You need it when the market is down and you need it when the market is up,” she says.
