Bridging booms in the pandemic
By David Craik -
People are increasingly looking to short-term bridging loans to help them deal with challenges and opportunities during the coronavirus crisis.
The bridging sector, like everything else in society, was battered by the onset of the pandemic last March. But demand from hard-hit individuals and businesses as they steer a course through the crisis has helped it bounce back.
According to the Association of Short Term Lenders (ASTL) bridging completions hit £470million in the second quarter last year, down 56% on the fourth quarter in 2019.
However, completions for the third quarter came in at £680million with bridging loan applications hitting their highest ever level reaching 7.6billion. That was up by a quarter on the same period last year.
The second quarter shortfall was partly down to lenders such as Precise Mortgages removing access to their online application systems for products including bridging loans because of having to deal with the demand from existing customers for payment holidays and uncertainty over valuations.
“There were others who increased their minimum loan sizes including one from £50,000 to £125,000 and another from £100,000 to £300,000,” says Vic Jannels, chief executive of the ASTL. “This really impacted customer choice.”
As Jhanzaib Nemat, founder and chief executive of broker Funding11, says most lenders also slashed their loan to value rates from between 75% and 80% pre-pandemic to around 60%.
“They were being careful,” he says. “Because of the economic uncertainty, they didn’t want to lend more money than properties were actually worth. The risks got higher.”
Another reason for the bridging collapse was the plethora of financial help such as Bounce Back loans and furlough wage payments offered by the Government to individuals and businesses.
“We saw deals fall through. The Government throwing cash at everyone killed the bridging market because these were more attractive loans,” says Harry Tuke of Elite Law Solicitors. “But bridging really came back with a vengeance around September as people became more optimistic about the course of the virus and the economy.”
That general optimism has ceased as a result of the devastating second wave, but the bullishness of bridging has remained.
“As time progressed bridging became a much more popular option for people as the mainstream lenders’ turnaround times for mortgage loan applications slipped dramatically,” explains Jannels. “We are aware that some were 30 plus days behind. If you were a vendor or purchaser eager to complete a deal, then bridging loans came to the fore. Our members are seeing record figures.”
Lender Market Financial Solutions (MFS) is one of those enjoying an uptick in demand. It recorded its strongest November on record deploying over £45million worth of bridging loans. This was followed by £22million in December.
It is still funding bespoke loans of up to 75% LTV. At no point did it stop lending.
“We have recorded a notable uptake in bridging loan enquiries throughout the lockdown,” says Tiba Raja, executive director at MFS. “Ever since the Government announced the first lockdown the number of mainstream lending products available has been limited and traditional lenders are taking longer to deploy finance, particularly in complex cases. When it comes to property investment, acting quickly and confidently is key. The longer the waiting time, the greater the chance of a transaction collapsing.”
She says the Stamp Duty Holiday, introduced last July and which raised the minimum threshold from £125,000 to £500,000 until March 31st, 2021, has also been a huge driver as people look to move up or on to the property ladder. It has led to house prices racing higher in every region of England.
“Bridging loans are ideal in this situation,” Raja says. “The circumstances surrounding the need for bridging loans have changed. Deadlines are tight, and in this competitive market where demand for residential real estate is rising, buyers are keen for fast and flexible finance. In this respect, the ability to quickly turnaround loans, from application to deployment has become more important.”
Vendors are certainly not hanging around.
“Vendors are asking purchasers to be in a position to pay in cash to speed up a deal,” reveals Tiara Hardy, Senior Specialist Adviser at mortgage brokers John Charcol. “Clients are coming to me saying they need a loan to complete a deal within a month. That normally would not happen. There are also thousands of people who have lost their job who can’t get access to a mortgage easily. They are selling buy to let or holiday homes. There are lots of opportunities out there.”
Tuke says another huge driver has been home refurbishments as people spend more time within their own four walls.
“Where they might previously have sold on, they have decided to sit tight and improve. They have used bridging to help them finish off their projects,” he says.
Despite the crisis and rising demand, Donna Wells, director at brokers First4Bridging, praises how well lenders have adapted.
“On the whole the bridging sector coped well throughout this challenging period, although some lenders emerged with more credit than others,” she says. “We’ve had to pick up the pieces from a number of cases where introducers approached us after their client had been left in limbo by their original lender. Thankfully, several proactive flexible lenders stepped up to the plate. Lenders gradually returned to the market with revamped product lines and customised lending, with some even looking to be a little more aggressive on the LTV front.”
One example is Precise which has re-started lending and in October revamped its Bridging Finance range increasing LTVs to 65% and maximum loan sizes to £1million. It also expanded property types to include HMOs (House in Multiple Occupation) and new builds.
Hardy says that lenders have also evolved their processes during the crisis.
“Desktop valuations have become more common as surveyors have been restricted in their movements. There has also been a more common-sense approach to underwriting,” she states. “Before it was very checklist driven but now it is more bespoke. They want to know the client more and what their expectations as a business or property owner are. We have added questions about whether they have taken out Government help and how they or their business has been adapting. It is more in-depth and focused.”
This has also allowed her to engage more with clients and explain how bridging can work for them.
“There is much more awareness out there that people can use bridging in more normal times as well. We’ve educated clients about what it is and how it works,” she explains.
So, will the bridging momentum keep going as we – hopefully – reach the end of the pandemic and beyond?
Raja is confident. “COVID-19 has resulted in greater market awareness about loan options beyond the high street. With banks and mainstream lenders still taking a risk averse approach, it makes sense for brokers and borrowers to seek bridging loan products and services which ensure they can be quickly and confidently deployed,” she says.
Jannels agrees: “Rates are much more competitive than they were 10 years ago,” he says. “People now realise that bridging is a speedy option to get a sale done. As the Stamp Duty holiday ends, I believe we will see a huge increase in demand for bridging as people are unable to get standard mortgages in place before the deadline. It is now the right approach for many people, and it won’t tail off when we are back to normal.”
Nemat is concerned about what comes after the stamp duty holiday ends and other Government financial support tails off.
Indeed, he is predicting a housing market crash by the middle of 2023 as the economy continues to suffer and more people lose their jobs.
“Bridging will come into play for individuals and businesses like pubs and bars because they won’t be able to get credit. Banks won’t lend to them and we’ll see repossessions,” he says. “Because of the risks involved we may even see LTVs go as low as 50%.”
But as in any market economy if pubs and retailers do fail in the difficult economic times ahead it means opportunities for others.
Tom Brown, managing director of Ingenious Real Estate says eager developers will look to take more bridging loans out to refashion abandoned commercial sites into residential properties. “We hope to double our bridging loan book this year. People are spending more time at home and want more office and garden space,” he says. “Co-living rental developments are of particular interest as remote working increases. Bridging gives developers the short-term finance they need to acquire a site.”
So, from developers in their hard hats to businesses and people seeing challenge and opportunity in the pandemic bridging is coming to the fore.