To mark a 10th anniversary is an achievement of note for any company but when that 10-year period spans the most tumultuous time in the history of that company’s chosen industry, it makes the milestone an even greater accomplishment. Last month marked 10 years in business for Vantage Finance, a Buckinghamshire-based master broker with an unconventional history.
Co-founder and director Lucy Hodge was raised in Buckinghamshire and followed the traditional path through her education while taking on a number of part-time jobs. This lasted until she was six months into her first year of college. At that time, in late 2003, with no set goal in mind she decided to join a friend who was working at a mortgage brokerage/packager.
“I wasn’t headed in a set direction and didn’t have a clear objective in mind,” she explains. “So when the opportunity came along to join my friend at the mortgage brokerage to start a career, I thought, why not? I went for an interview and the rest is history.”
Hodge and her friend began by helping with administrative tasks while learning how to package cases at PDQ Mortgage Services in Slough, which was primarily involved in sub-prime mortgage deals.
“We were involved in some second-charge packaging as well but we were mainly in the sub-prime, self-cert space and complex buy-to-let – products that were really booming at the time,” says Hodge.
She and her friend used their time at PDQ to learn the workings of the mortgage market and, by the middle of 2004, the pair felt ready to launch their own proposition.
“It occurred to me I could do this,” says Hodge. “It started from what was a flippant comment and became a fully formed idea within a very short space of time.
“We told our employers we felt we could run our own operation. They must have thought we were mad but they wished us luck and off we went.” Then, in September 2004, Vantage Finance was launched when Hodge was just 18.
In its early days, Vantage consisted solely of Hodge and her friend, who she would like to remain anonymous. The pair remain close to this day but Hodge took on sole ownership of the business when her partner left to pursue other interests in 2008 as the market fell deeply into the recession.
Before that, however, the business had to be built and, as Hodge tells it, this was no easy project. “We were young females launching into the market but what was scarier was our lack of experience,” she explains. “Trying to persuade people to give you a chance when you are basically untested is the biggest challenge we faced.”
To some the task would seem even more daunting given they were launching into a male-dominated industry, but Hodge is quick to dismiss any suggestions it is harder for women to make their way in the industry. “When we started out, we would walk into industry events and that majority would be obvious,” she says. “Things have changed a lot since then but, to me, it really makes no difference. If you’re good at what you do, that’s the end of it.”
The first year in business was spent “knocking on doors” and pitching for business. Just as the hard work started to bear fruit and Vantage Finance was taking off, the market crashed through the floor. “We launched at a time when the market was a lot easier than it is now,” says Hodge. “Business was booming. Our divisions were working with some great businesses and together we were writing bigger volumes. We were trying to pave our way into an established industry that was really going strong.
“Unfortunately, we had just started to gain traction when the mortgage market came to a standstill.”
Navigating the downturn
As the crisis began to bite, all forms of lending tailed off as funding became scarce and things got tough. “Experience teaches you a lot so perhaps things would be different now but back then I don’t think there were more than a handful, if anyone at all, that saw what was about to happen,” she says. “We joined a party when it was very much in full swing. Things had been buoyant in the industry for some time when it all crashed and the music stopped.”
When that moment came, Vantage Finance was able to weather the storm largely because it was still a small operation, says Hodge. After assuming sole control of the company she decided to make short-term lending its core business. The scaling down helped to see Vantage through a tough period.
“Our overheads were not massive and we were able to scale back until market opportunities started to present themselves again,” says Hodge. “We were up to around eight staff members before the crunch and had to make a couple of cutbacks, which is never nice. It was then that my business partner left and the reduction in costs may have proved critical to the survival of the business. We managed to trade through the quiet times, just enough to keep us profitable, and not too long after there were deals to be done.”
After the crisis
The bridging sector has gone through huge changes during the past decade, particularly in the wake of the financial crisis. Hodge says: “You cannot overstate the differences in the bridging industry today from what it was. Bridging was seen very much seen as the lending of last resort, whereas it has since become something of a lifeline to those who use it.”
With borrowers facing a diminishing range of options in the wake of the crunch, brokers turned to alternative options and the bridging industry became a far more attractive proposition.
“As things turned sour in the mainstream market, a selection of bridging lenders that had access to funding were able to step in and provide a much-needed option,” she says. “Those same brokers who previously saw the bridging sector as somewhat dingy began coming to us with enquiries.”
It was not only sub-prime deals that required bridging finance in the aftermath of the crisis, according to Hodge. Many borrowers, who previously would have been accepted by even mainstream lenders, found the doors had been closed on them, leaving bridging lenders with a pool of creditworthy borrowers requiring short-term finance for a variety of projects.
Hodge says: “We were funding mainstream applicants, property developers, purchases with complex planning angles – all sorts of deals. In no way was the industry restricted to sub-prime deals.”
Back to normal
The West One Loans bridging index reveals the industry has gone through a boom period in recent years. In the 12 months to June 2011, annual lending in the sector totalled £0.7bn, compared with £2.2bn in the year to June 2014.
Hodge believes the hard work put in by brokers and lenders since the crisis has led to a new identity for the bridging sector and that growth is likely to continue.
“The mainstream mortgage market has started to come back in the last 18 months so, naturally, some borrowers will migrate back to the mainstream,” she says. “That said, bridging prices have come down in the last couple of years and the added benefits of getting a deal done quickly will help the industry continue its growth.
“The rate of that growth might temper slightly but growth is almost always a good thing, and to do so at a more ‘normal’ rate is itself probably a positive.”
Interestingly, Hodge says the bridging industry is not in need of any rampant innovation to keep up business levels.
“Mainstream lenders have their proposition, bridgers have their own.
“In the last two or three years, we’ve seen some innovation in terms of how certain lenders view risk and what they offer to gain market share, but really I think we are good where we are.”
From Hodge’s point of view, the market is becoming saturated by a wealth of lenders offering largely similar products.
“I would certainly say there isn’t much room for new entrants as there are a lot of lenders in the bridging space. But the result of that is that prices are coming down, which is good for the end consumer.”
Threats to the market
Asked what could potentially hinder the industry, Hodge initially talks of general market threats. The eurozone, a hit to economic recovery and mixed messages from the Bank of England on interest rates are all possible stumbling blocks, but Hodge believes the major change in the next five years will be a result of regulation.
In 2014, the wider mortgage industry has seen the implementation of the Mortgage Market Review in April, followed by a Bank of England announcement that from 1 October lenders must limit new lending above an income multiple of 4.5 times income to 15 per cent of new lending.
The BoE has also introduced a rule that mainstream mortgage lenders must stress-test borrowers against a 3 per cent increase in the prevailing interest rate when they took their mortgage out.
Added to that, the regulation of consumer credit transferred from the Office of Fair Trading to the Financial Conduct Authority in April.
Hodge sees further regulation looming on the horizon for all sectors, including the bridging market. “We are not afraid of regulation but I think within the next four or five years we will be operating in a highly regulated market,” she says.
“We are already hearing questions around the EU Mortgage Credit Directive and whether that will lead to buy-to-let regulation, and I’m sure we will see tighter restrictions on all lending sectors in a few years.”
MMR, which came into effect on 26 April, placed lenders – including those in the bridging sector – under a far tighter regulatory regime as it seeks to protect borrowers from taking loans they cannot afford.
Playing by the rules
Vantage Finance is directly authorised by the FCA and Hodge believes this has helped her and the business better understand regulatory requirements. Those who have not embraced regulation in the past may struggle going forward, she says.
“It is the brokers who have not had to embrace regulation in the past that are now facing a steep learning curve. I don’t know if discontent is the right word to describe market sentiment following MMR but certainly there has been disruption.
“Lenders have had to adapt their systems to try and find a new normal in the market, while making sure that borrowers understand the new requirements. Without a doubt, we have all seen things get a little tougher.”
But Hodge adds that the sector is becoming overregulated. “We do seem to be making it very difficult for people to transact business in areas where the consumer doesn’t necessarily benefit from that regulation,” she says. “The way it has all been announced seems to have been somewhat disorganised and navigating through the changes has been difficult for many”.
If given the powers of the FCA, Hodge says she would ensure regulation was restricted to residential, owner-occupied mortgage loans. “I think the FCA’s focus on bridging loans is just to stamp out any unscrupulous lenders, and that is the way it should be. But, in truth, my view is that regulation should be kept to protecting consumers taking a loan to buy their own home.
“Bridging is there to help people who may be downsizing or looking to develop or convert their own houses, for example, and those are the parts of bridging lending that are regulated. I think the FCA should be mindful not to venture into other areas that are really more of a business transaction.”
Swings and roundabouts
Within a relatively short time, Hodge has seen the market hit rock bottom and then return with gusto. Meanwhile, there have been huge regulatory changes and a slow shift in the public’s perception of bridging finance. And it seems the next 10 years are likely to be just as eventful.