How the new normal is shaping demand in the bridging industry
By Leah Milner -
The bridging sector has faced a turbulent year so far like so many other parts of the economy, but brokers have remained resilient in the face of unprecedented change.
In its latest bridging trends report covering the first half of the year, MT Finance noted a 45 per cent fall in gross lending volumes recorded by contributors to the index from £370m in H2 2019 to just £202m.
Zoning in more closely on second quarter activity, lending of £79.4m was down by 35 per cent compared to the first quarter and by 57 per cent compared to the same three months in 2019.
Within those totals the mix of lending has shifted significantly, as the share of regulated bridging loans swelled from 37.5 per cent a year ago to 55.6 per cent in Q2.
Second charge bridging also increased its market share, accounting for more than 26 per cent of lending in Q2 compared to just under 19 per cent a year earlier.
But how do these headline statistics compare to the real life trials and tribulations of specialist brokers in the field?
We spoke to some of the top advisers in the short-term lending space to find out how their business has been affected by lockdown and what changes they have been seeing since the reopening of the housing market in May.
Lucy Barrett, managing director at Vantage Finance, says her firm has received strong demand from borrowers who are looking to refinance – either from a conventional mortgage to a bridging loan or from one bridging loan to another.
She says: “In some cases that is because people can’t get the lending that they would have previously been able to secure from standard-term mortgage lenders and therefore they are having to rely on a bridge.
“That’s because lenders have scaled back their criteria and some are just not taking new applications at all at the moment so people are having to come up with an alternative plan.
In addition to that we are definitely seeing more borrowers looking for extensions and people are coming to us very early on to say that they already know they are not going to meet their exit plan.
Often this is because they were doing work to the property which has been delayed due to lockdown.”
Barrett says that some borrowers have been left disappointed as they incorrectly assumed it would be a simple matter to extend bridging terms given that there has been so much forbearance in the wider market because of Covid.
However, she says that sometimes lenders are unable to offer an extension because the additional rolled up interest would take the borrower above maximum loan-to-value thresholds, especially as these have come down as a result of the pandemic.
“If borrowers are already at their maximum loan to value, lenders may not have the ability to breach their LTV covenants as their own financing arrangements may make it impossible for them to do so,” she explains.
In spite of this, Barrett says that Vantage has been successful in obtaining extensions for most of its clients.
Echoing the trend highlighted in the MT Finance findings, Barrett has also seen an increase in regulated bridging, which she puts down to the tightening up of credit in the mainstream mortgage market resulting in more residential borrowers turning to short-term finance.
Second-charge bridging has also been up at Vantage, in line with the market trend reported by MT Finance.
Barrett says that this option makes sense for property owners who already have a competitive mainstream mortgage in place and need to raise additional finance but don’t fit the criteria for additional borrowing from their original lender.
A second charge bridge means that they only need to pay the higher costs associated with short-term lending on the extra amount they need to borrow, as opposed to refinancing the whole deal onto a bridging loan and paying higher rates on the total sum outstanding.
“If you have got an outstanding mortgage of £1m from a mainstream bank with a great interest rate and you need to borrow an extra £50,000 for building work, it doesn’t make sense to repay the £1m and switch the whole amount onto a bridging loan when you could get a second charge bridging loan and only pay short-term lenders’ rates on the £50,000.”
Sirius co-founder Adele Turton says that post-lockdown there has been a surge in interest from buyers, but this enthusiasm to get deals moving is not always matched by lenders who have been taking a cautious approach.
“There is a huge appetite from clients to buy and this has been pushing property prices up, because estate agents think they can ask for another £20,000.
This is not so much driven by the stamp duty changes, but more the fact that lockdown stopped people from moving so now there is pent-up demand.
“But even though agents have been putting up prices, valuers have then been knocking them back down. Some lenders have been questioning survey reports and going back asking to double check the figures.
The gap between lenders and clients seems to be getting wider, as expectations and reality don’t match up. It is all creating a lot of extra work for advisers.”
Turton says that lenders’ caution on refurbishment cases has been amplified by quarantine rules which have affected materials coming into the country.
“During lockdown nobody could get any plaster,” she says. “It was crazy and the cost of it went through the roof. Some jobs were stalled for three months, which is a lot of time to lose if you are in a 12-month bridge.”
Crystal Specialist Finance group sales manager Jason Berry says that over recent months, bridging has overtaken all the other specialist sectors that the firm operates in, including commercial, complex buy-to-let and development finance.
He says: “Within those bridging application profiles the highest number are borrowers refinancing previous bridging loans where they have had an issue when it comes to their exit.
It might be that the development hasn’t sold because of the pandemic, or building has stalled because there is a lack of workmen.
We have also seen a lot of demand for bridges to buy auction properties since July.”
Impact Specialist Finance managing director Dale Jannels says lockdown prompted considerable difficulties for some clients as lenders acted quickly to lower LTVs or reviewing valuations.
But he says that enquiries and applications have increased dramatically, but overall completions were considerably down across the sector.
He adds: “On the whole, lenders in the short-term lending sector performed as well as any during the pandemic, but with the overriding need to speed up.
Bridging needs to be the fastest way for clients to achieve project completion and the current average circa 50 days means many applications may not complete as other opportunities open up for clients”.