Three major impacts COVID had on bridging finance

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The public COVID-19 inquiry is pulling back the curtain on some of the most scandalous governmental dealings of the past years.

Sunak brazenly rejected medical advice. Boris scrawled “BOLLOCKS” across health guidance. And the Cabinet delayed lockdown because they “don’t work on weekends“. It’s been a lot to unpack.

As the inquiry moves into its seventh month, we’re scrutinising how the pandemic and surrounding policies affected the world of bridging finance.

What scars, successes and setbacks does the industry still face today? And most importantly, what did we learn?

1. Stamp duty cuts may have jumpstarted bridging loans

A little incentive went a long way. After a 38% plunge in 2020, bridging finance came back swinging in 2021 and 2022. No small part thanks to the stamp duty cuts.

As hopeful homeowners surged to snatch up properties before the stamp duty deadline, lenders plugged the gaps left by overwhelmed banks and mortgage providers.

According to Bridging Trends data, opportunistic investors made up the bulk of borrowers. While broken chains accounted for the second largest group.

As bridging lenders grew in confidence, they provided increasingly generous loan-to-values. By the end of 2021, rates shrank to just 0.72% on average.

Even today, despite the hiked-up rates, bridging is still riding the wave of success, propelled by steady demand.

We can see from this that money-saving incentives bode well for the industry.

2. The bounce back loans that never bounced back… how frauds and failed businesses hit lenders

However, it may not have all been good news for bridging lenders. The Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loans have come under fire.

A shocking 43% of loans were handed to fraudsters, and despite government promises, lenders might not get this money back.

Last year, co-founder of Albatross Capital, Jordan Fernley-Brown revealed his suspicions about the schemes. Firms “don’t get their money back from government”, he predicted. So far, Fernley-Brown appears to be partially correct.

In November 2023, the government removed its guarantee on nearly £1 billion worth of loans. As ministers grapple to relieve some of the burden from taxpayers’ shoulders, promises are getting broken. But there could be much more to follow. Reuters have uncovered a staggering £47 billion still outstanding.

Not all bridging lenders have been affected by bad loans, however. Aspen Bridging manoeuvred well.

“In our view CBILs – done responsibly – was positive. We had no defaults and all our CBILS loans are now fully redeemed”, comments Director Jack Coombs. “The government was therefore never claimed against for capital”.

Despite the market commotion, lending with a clear head during this time was paramount for success.

3. High interest rates swallowed up liquidity… and even a few banks

To counterattack against a looming recession, between 2020 and 2022, central banks printed more money, known as quantitative easing. This, combined with a confetti of governmental stimuli like tax cuts, loans and “Eat Out to Help Out” fuelled rampant inflation. Prices of goods surged upwards.

UK inflation rocketed to an eyewatering 11% in 2022, a 9% increase from 2019. It put significant strain on UK shopping baskets. An item costing £10 in 2019, came to £12.26 in 2023.

By May 2023, Bank of England’s former chief economist, even Andy Haldane admitted mistakes were made. And the current government has come under attack too.

What goes up must come down and central banks were forced to undo the damage. In 2023, the Bank of England cranked up interest rates to 15-year-highs.

“Coming out of the pandemic and into a cost-of-living crisis, the Bank of England’s rate hiking cycle brought the importance of flexibility into even sharper focus”, reflects Tiba Raja, Executive Director at Market Financial Solutions.

Spring 2023 saw a wave of global banks fall prey to the devastatingly high interest rates, including the formidable Credit Suisse. The collapsing banks created a black hole for liquidity, causing mayhem for lenders without their own funding pools.

“I think that a lot did struggle”, reveals Simon Pollins, CEO of The Mezz Lender. “Their cost of funds became so high such that their charging rates became prohibitive for borrowers”.

Lenders who drew funds from their own private pools had the upper hand in this environment. For newcomers relying on banks, 2023 must have felt bleak.

… But the most significant impact wasn’t driven by policy

COVID turbocharged another trend, technology. As Raja elaborates, “online platforms for application submissions, document verification, property valuations and more quickly became the norm”.

Advances in technology have hit all-time highs and show no signs of slowing.

“Before COVID, many lenders were still lagging behind other industries in terms of digitalisation”, adds Rowan Clayton, Product Director of Finova. “The modern and digital bridging loan process is now very different”.

While open-banking, online auctions and broker portals accelerate into the mainstream, the competition widens for slow-moving firms.

Perhaps this is the true legacy the pandemic left on the bridging industry. Especially as modern lenders now have the tools to race ahead by creating evermore relevant products.

“Lenders have never enjoyed a greater capacity for offering new and innovative products”, Clayton affirms.

The pandemic proved that while the sector may go through ebbs, flows, adaptations and new ways of workings, it is resilient.

“Bridging is rapidly becoming more mainstream as customers explore all available routes in their mortgage journey”, agrees Clayton.

So long as there are people requiring property, there will always be demand for high quality bridging lenders.

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