Clear exit routes are imperative for viable bridging solutions
The buy-to-let market has been a struggle in recent years. Landlords have been hit hard by stricter tests enforced by lenders and regulators. As a result, refinancing and raising further capital has become more difficult. So much so, we have seen the term ‘mortgage prisoner’ make a comeback in the mainstream media.
Despite this traditionally being one of the best seasons to sell a property, house prices are being affected by declining transactions. According to the Your Move index, annual property prices rose by just 1 per cent in March – the 11th consecutive month the annual rate of growth has fallen.
That said, some promising developments have resulted from this shift in the market.
Adapt and evolve
Lending activity has increased outside the classic hotspot areas of London and the South East. Indeed, there have been surges of growth in unassuming places, with Swindon, Glasgow, Newport, Edinburgh and Gloucester the five most in-demand locations.
Although some investors have left the market many are adapting to the change, resulting in an evolution in the professional landlord type. Such adaptations include a change in entities (from, say, individuals to incorporated companies), choosing alternative property investment types and turning less to high-street lenders and more to specialist finance players.
In many of these scenarios, short-term specialist solutions such as bridging have picked up as a handy fix where traditional finance has not quite been able to fit.
This is reflected in the growth of bridging finance. West One’s Bridging Index reports the market reached £5bn in gross lending last year, a staggering 24 per cent up on 2016 despite a rocky recovery from the Brexit vote.
Handle with care
Beyond its typical use as a ‘chain break’, property professionals are now using bridging as a short-term funding solution for a variety of situations. However, as bridging loans are designed for a short duration it is imperative the client has a viable exit route to pay off the loan. This is a key factor in underwriting.
In a less stable market, there are concerns for lenders and brokers when it comes to assessing the viability of the exit route.
At a time when traditional funding might not be as readily available, customers considering bridging really need to deliberate on the ‘what ifs?’ and not just hope for the best.
In many cases, Plan A may no longer be the safest exit, particularly if sale, refinance or other funding is, realistically, unlikely. It’s time to take Plan B seriously. Worryingly, intermediaries under pressure are increasingly asking if they can just give their clients a bridging loan when term funding is not available. This brings into perspective the bigger picture of bridging.
Bridging loans can be useful but they should not be abused as a makeshift alternative to term debt. Brokers and lenders should be careful if considering it for this use. Wrongly placed bridges in the present volatile conditions could be challenging for the market and, with everyone chasing market share, there could be casualties.
Putting the bridge in place is only the first step. For a short-term loan with the emphasis on a safe exit brokers must stay in touch with the client for the term of the loan. This is not just beneficial for the customer; it also builds relationships, which is good for business.
Bridging is growing and brokers aware of the uses of bridging loans, the importance of the exit strategy and how they can be placed will be able to help clients take advantage of time-sensitive opportunities and benefit from expanded service offerings.
Lucy Barrett is managing director of Vantage Finance