Bridging Watch: Using short-term loans to beat stamp duty deadline is dangerous

Phil-Jay-700.png

Advising clients to use a bridging loan as a stopgap in order to ensure completion on time is an understandable option but it is one fraught with potential danger

While there may be a difference in the actual numbers, any bridging statistics you look at for 2015 will agree on one thing: the market continues to grow by every measure.

It is easy to forget that the bridging sector has been the most consistent provider of short-term finance since the credit crunch. At one point, when many institutions had backed away from lending, it was the bridging community that provided much-needed liquidity for consumers.

The fact it is still expanding, even when other lending sources have returned, is a testament to its adaptability and the simple promise of immediate funding for a limited period.

Warning

There have been siren calls in the past about how bridging finance has been misused or even misadvised as a means of getting around the stricter affordability tests on the high street. The evidence of this activity has been sketchy at best but I would like to give a warning about advising clients on bridging finance.

With the upcoming deadline for stamp duty increases on buy-to-let and second homes, there will be a big rush to get purchases over the line before April.

Advising clients to use a bridging loan as a stopgap in order to ensure completion on time is an understandable option but it is one fraught with potential danger.

On paper, bridging finance looks like a great ‘Get out of jail free’ card for clients who have left it late and do not want to be subject to extra stamp duty costs if they can help it. However, it is vital to remember that placing short-term finance depends on being very sure there is a longer-term package available. The dangers of getting it wrong are high. At best, the client could be left paying a costly rate longer than necessary; at worst they could have to resell to pay off the loan if other funding is not forthcoming.

MCD benefits

Elsewhere, the all-consuming Mortgage Credit Directive is on a final collision course with Planet Lending. In my opinion, the changes it will bring can only strengthen the legitimacy of bridging in the eyes of the wider advisory market.

The introduction of the European Standardised Information Sheet will certainly help sort the wheat from the chaff.

For that minority of lenders who still see transparency of terms and disclosure at outset as some sort of challenge, this will leave them with nowhere to hide.

Brokers and their clients will have a much clearer view, being able to compare like-for-like when making borrowing decisions

Second charge loans falling under the same regulatory umbrella as firsts will make advisers think differently about the options for clients. One of the struggles we have had previously was in legitimising bridging to a wider audience. Until now, a fair percentage of intermediaries would not consider a short-term loan or a second charge purely because it was a weak and unfamiliar subject for them.

As brokers learn more about the opportunities for helping clients who need to move quickly to raise short-term finance, bridging will surely gain even more traction.

As you can see, I am all for regulation, particularly when it helps to create a level playing field for more peripheral lending channels such as bridging to be considered on their merits. We have nothing to fear from a regulatory structure that favours customers, practitioners and lenders, as well as promotes greater understanding of the products and services we offer
our clients.

Phil Jay is director of Complete FS