Richard Butler Creagh on Bridging scales in the evolution
Welcome to the Richard Butler Creagh blog. Richard Butler-Creagh has been in the bridging lending business for many years. He became involved with this sector through his experiences in buying and selling his own properties.
The bridging market now bears little resemblance to that of ten years ago. In a recent survey, 79% of lenders surveyed believe the market size to be more than £3 billion with 29% estimating it to be over £5 billion.The actual size of the bridging market cannot be measured as it comprises a large number of smaller lenders across the country with no formal register of who is lending. But 60% of those continue to grow over the next six months.
Historically, bridging may have been seen as lending of last resort but this is no longer the case. Many firms are now as respectable, and well run, as any mainstream mortgage lender.And, there is a growing awareness of the valuable role that bridging and short-term lending plays, not only for homeowners but particularly for businesses and developers.
What did not change as quickly was the perception of bridging as a place to make quick money. The bridging market meanwhile, with its flexible underwriting and case-by-case lending, remained relatively buoyant.There has consequently been an influx of new lenders over the past few years, each viewing the bridging industry as the way to make the returns no longer available either on the High Street or the stock market.
However, both small and larger lenders entering the bridging arena have discovered bridging is not the easy money it may appear to be. The rewards may be accompanied by risks, well known and catered for by professional bridging lenders through stringent due diligence.This has caught out many unwary smaller lenders, while larger names have discovered that, in order to put sensible measures in place to mitigate any risks, the returns are no longer what they expected. Hence, we have witnessed challenger banks particularly, coming into bridging, then leaving again.Where some larger lenders have been more successful is in funding existing bridging lenders. This mitigates many of the risks while also providing higher returns that cannot be achieved through mainstream lending.
Purpose of bridging loans.Bridging has long since moved on from its original purpose as either a vehicle for auction purchase or for people buying a home before selling their existing one. While these are, of course, still valid uses of a bridging loan, far more prolific now is its use by developers, landlords and property investors to buy, refurbish and/or develop property.
Many businesses also turned to short-term lenders to provide them with finance, driven by a lack of commercial lending by high street banks. Consequently, businesses of all types now use bridging as a fast source of additional capital, borrowing against existing property to fund business acquisition, expansion or take advantage of other opportunities.So, far from being the lending of last resort, bridging is increasingly the first-choice option, meeting a very specific need.
What hasn’t changed is the need for bridging and short-term loans to be both fast and flexible. This still calls for individual underwriting with each case looked at on its specific merits with a turn-around time of days if not hours. Achieving this while carrying out thorough due diligence both on the property and the borrower is key to success.
Exit routes are king.Responsible lending for bridging lenders is not about a borrower’s ability to make monthly payments but more about exit routes.Unlike a twenty-year repayment mortgage, paid off in instalments over the term, bridging loans have more in common with interest-only with the entire sum paid off at the end. Only, in the case of bridging, it is more usually a loan term of between three and 24 months. Therefore, the most fundamental issue affecting all bridging lenders is: what is the exit route and do I stand a realistic chance of having my funds returned within the set time period?
Key questions are: Is the borrower intending to move onto a longer-term loan or sell the property?
Other property investors will plan to sell the property or properties once any work has been completed. Consequently, a bridging lender has to weigh up how realistic that sale or refinance will be both within the forecast time period and for the amount the borrower is expecting to achieve.
Bridging lenders therefore need to understand more than just their own sector when looking to grant a loan. Every prudent bridging lender will want to know up front, the likelihood of their borrower obtaining a longer-term mortgage or sale. They therefore also need to be in touch, both with the underwriting policies of mainstream lenders and the predicted movement of property prices in the region they are considering lending.Of course, even over six months to a year, much can change and much can and will go wrong; it is therefore wise for the lender, the borrower and their broker to have contingency plans in place.
Default interest rates.The subject of default interest rates, is currently a hot topic. Default rates are a deterrent to help ensure borrowers pay their loan back on time. They can be charged from the day after a borrower reaches the end of their term if they haven’t paid back their loan.Default rates can be anything from 0.6% to circa 5% per month, although it is hard to quantify exactly how much as few are declared publicly. As in all things, not all default interest is created equally however.
One factor is whether interest is charged daily or monthly. A low default interest rate does not save as much as it may appear if it is charged for a month on a loan paid back after just a few days.The lower the LTV on a loan the more leeway a bridging lender will usually have. Because, typically, interest on a bridging loan is rolled up, on a higher LTV loan it can be unaffordable for a lender to extend a loan as this could lead to there being little equity left in the property.
It is this that makes almost any bridging loan over 75% LTV such a risk and why most prudent lenders will actively lend at lower LTVs unless they know the borrower well. Typically, it is the newer lenders who don’t appreciate this and move further up the curve to gain business and make a name.
Competition lowers rates.This brings me to the recent influx in competition. Both big names and small have entered the bridging arena over the past few years and while some remain, others have disappeared again, realising that bridging is a specialist area of lending that requires experience and skills to do it well.There are still a number of new firms entering the sector however and the continual influx has done much to reduce rates. Rates that were easily 1.5% per month a few years back can now be 0.6%pm or even lower.
To regulate or not to regulate? How to judge a good bridging lender from a bad one, and perhaps more importantly, how a broker or borrower can establish this fact, is a perennial problem.Whether to regulate all lending types, including bridging issue that has been debated for a number of years.
A look into the future.At the time of writing the three key topics pervading the bridging press are: default interest, whether peer-to-peer is tarnishing the reputation of the bridging industry and the regulation issue.It is almost inevitable that more loans will end up being regulated. Whether that is good for the end borrower or not is a moot point; the belt and braces approach will almost inevitably see regulation creep into areas such as bridging at some point in the future.
The positive of a spotlight on this, should be that any lender still taking unreasonable risks will have to either raise their game or leave the market. Anything that improves the reputation of bridging still further will help raise its profile as a very real option for the right borrowers. This can only be of benefit to the sector and borrowers alike.
Richard Butler Creagh has been one of the first people in the UK to identify the need for reliable and fast bridging finance. Since founding the company he and his wife Charlotte have helped thousands of developers and property professionals get the funding needed. If you need funding for your UK property project, then Richard Butler Creagh through his website here. Follow Richard Butler Creagh‘s Linkedin page for more news. Be the first to know about Richard Butler Creagh‘s breaking news and special reports here.
