As new entrants flock to the sector, it may be difficult to compare like with like but there are key attributes to look for
The number of new entrants appears to be gathering pace. At least once a month there is news of another lender.
Many existing names find the mainstream market crowded, with low interest rates and high capital adequacy requirements leading to decreasing returns. No doubt they see bridging as a way to break out of that and increase shareholder or member value.
However, despite a growing number of sourcing systems with which to rate specialist lenders, it is difficult for brokers to compare like with like.
More than rates
The first thing most borrowers and brokers look at is interest rate. Increased competition is driving rates down. This may sound like a good thing but you get what you pay for. There are different risk levels in bridging, different turnaround times and different loan requirements.
A key point to consider is how a lender is funded: is it externally funded or is it a true principal lender with its own money? This can affect whether the borrower gets the money they need.
If a lender is externally funded, it is likely to have to go to an external credit committee for approval of a loan it has already given a decision in principle on.
This sometimes means the funds are unavailable or the lender has to renege on its original promise. On the other hand, a principal lender is entirely in control of the money it lends so, unless the borrower has not declared all the facts, yes will always mean yes.
Enter the building societies
Every lender is seeking a different niche. Building societies seem to be entering the market with one-year ‘chain breaker’ loans: regulated householder loans for people who need cash to buy their new house while the buyer chain behind them sorts itself out.
These appear to be relatively low-risk loans, with minimal individual underwriting. As a result, rates are likely to be lower than on many traditional bridging loans.
If they are sensible, other new lenders will look at different niche areas, such as ground-up development loans, short-term secured business loans or bridging loans as a second charge.
What is more dangerous is new entrants looking to enter the market at any cost. Existing larger lenders are big enough to compete on price. More bespoke bridging lenders compete on service instead, with high-level, high-speed, individual underwriting for quick purchases, buy-to-let development or refurbishment. Providing such a service will, by its very nature, cost slightly more.
The risks to the reputation of the industry are the deals that look too good to be true. If the price is too low, it becomes more challenging to provide the detailed level of individual underwriting required. This increases the likelihood of defaults and the risk of a lender falling into financial difficulty.
The same is true with lenders that take endless rebridges. There is a time to rebridge a loan: if work on a property has taken a little longer than expected, for example, but there is still a clear exit route and inherent profit.
The crucial element is the exit route. Endless rounds of rebridging are like a game of Pass the Parcel, except when the music stops the one left holding the loan loses.
So where will we go from here? Rates will continue to fall, driven by increased competition, which is also likely to fragment the market as different lenders focus on different niches, but to an even greater extent than now.
Brexit negotiations may also shake up the market. If the UK does not get the deal it needs, externally funded lenders may find their funding lines pulled again. Meanwhile, those that have been involved in riskier lending may be a casualty of any downturn.
The surest bet has to be smaller, well-capitalised, independently funded lenders that still deliver in all economic conditions.
Jonathan Sealey is chief executive of Hope Capital