The aim of tougher affordability tests is to build a sustainable market and if that involves a readjustment then so be it
Recent research by MTF found that a rising number of brokers were resorting to bridging loans for clients who had failed to secure a mortgage. I was surprised to find that, in the fourth quarter of 2015, more than half of brokers turned to bridging finance as an alternative source of funding to fill a liquidity shortfall.
Change in perceptions
Long gone are the days when bridging loans were considered a last resort for funding and no doubt the market’s recent success is thanks to a change in perceptions around it. As more lenders have entered the sector, bridging products have increased in both sophistication and accessibility.
However, the recent flurry of regulatory regimes has placed perceived barriers in the way of buy-to-let landlords and, as often is the case, the less experienced investors are set to feel the brunt of these changes.
The latest proposal is the Prudential Regulation Authority’s consultation around introducing tougher affordability tests. Many professionals have already touched upon the fact that these changes may prove to the advantage of those operating in the specialist lending space. Nevertheless, and regardless of the outcome of the consultation, brokers should not be tempted to revert to using bridging facilities as anything other than a short-term solution to funding.
Delaying the problem
When considering the suitability of a bridging loan, the focus should remain on the client’s exit strategy. Generally, borrowers who cannot obtain a mortgage for short-term affordability reasons will use a bridging facility only if they plan to exit through the sale of a property in the near future. With the PRA’s proposal applying to new buy-to-let landlords, I cannot imagine an exit through sale being the end-goal for most investors. In which case, a bridging loan would only defer the problem rather than solve it.
For cases where unique circumstances mean clients do not meet the criteria for more traditional funding solutions – for example, if they have recently taken a new job or are awaiting capital from something like inheritance tax – bridging loans are, of course, a reasonable option. It is the temptation to stray from the traditional principles of bridging that may pose a problem.
Ultimately, the aim of tougher affordability tests is to build a sustainable market and if that means a readjustment then so be it. The consequences are not too troubling and investors should start to accept the new norm.
My hope is that both brokers and lenders will continue to act in the best interests of their clients. The specialist lending market should take full advantage of these changes but, in areas as specialised as bridging, the emphasis must remain on ensuring that all lending is appropriate.
As regulators continue to add protections for borrowers, we too should recognise our responsibility to maintain a sustainable market.
Lucy Hodge is director at Vantage Finance