Bridging finance, otherwise known as short-term funding, has played an integral part in the property market for years.
In the past the sector had a reputation for being difficult and expensive, with horror stories about vulnerable borrowers being held ransom by unscrupulous lenders. But it has matured considerably in recent years and brokers and borrowers have developed a new appreciation of its worth.
At one time the bridging sector was controlled by the big four clearing banks – Barclays, Lloyds TSB, Midlands and Nationwide – but this is no longer the case.
They lost control of the market when almost all their loan decision-making was centralised. This meant they were unable to respond quickly enough to borrowers’ demands.
The result has been the emergence of a new breed of specialist bridging provider with a more entrepreneurial approach to short-term funding.
There have been many market entrants and this increase in numbers has generated a healthy degree of competition. Given that most bridging loans have terms of less than a year and frequently just a number of days, they needn’t be expensive – rates of around 1% per month are available with low or no exit fees.
As the bridging market has developed, industry pundits have debated whether or not it should be regulated by the Financial Services Authority. And the Council of Mortgage Lenders is looking at whether a bridging finance trade body should be set up, indicating that the sector is now regarded as a significant part of the mortgage industry.
Some providers have called for self-regulation in an effort to improve the sector’s reputation and standards. In fact, one advocate has developed its own code of conduct based on the FSA’s Treating Customers Fairly initiative.
The code stipulates charging interest on a daily basis in the month of redemption rather than a monthly one, and suggests minimum terms of no longer than one month with no early repayment charges other than minimum terms.
The message is simple – just because bridging loans are unregulated does not mean TCF has no role to play. Lenders must ensure clients get fair deals and have viable exit strategies.
At the moment, only bridging loans including first charges on borrowers’ residential properties are regulated by the FSA. All other products escape its scrutiny.
The majority of bridging loans are commercial transactions involving businesses capable of making informed decisions about financial risks, so they do not warrant the same level of protection given to residential mortgage customers.
But this does not mean lenders should act recklessly and the promotional material for all bridging loans are still subject to the FSA’s MCOB rules, which specify all promotions must be clear, fair and not misleading.
It’s unclear whether the sector will become regulated in the future but it may be advantageous for lenders and brokers to conduct themselves as if it already is.
Consumer confidence is a key driver in the industry and all businesses will benefit if they develop reputations for honest, professional service.
The liquidity crisis has affected the whole financial services industry. Restricted funding means lenders have had to adapt by tightening criteria and charging higher interest rates, despite the recent Bank of England base rate cuts.
This could have a positive effect on the bridging sector as borrowers look for alternative financial solutions. But most bridging lenders will also be feeling the effects of the credit crisis and have limited funds to lend.
Bridging loans are probably best known for providing a way of financing the completion of house purchases while waiting for the sale of others. This is an important facility in the residential property market where so many purchases are subject to the house buying chain.
Bridging loans provide a timely but short-term method of borrowing funds and are frequently used to purchase discounted properties at auction, when completions are typically required in 28 days.
But it’s always advisable to have exit lenders in place as bridging finance can be expensive over longer periods.
Once investors have purchased property at auction they will look to redeem bridging loans with remortgages as soon as possible to minimise costs.
This is great news for brokers as they can receive two proc fees – one for the bridging loan and one for the remortgage.
The liquidity crisis will cause an increase in distressed sales, so investors will be able to get big discounts off properties’ market values. Buy-to-let investors will look to bridging finance to help them snap up bargains.
Bridging companies will normally base their LTV calculations on true market values, allowing investors to spread their capital over larger portfolios. In fact, 100% LTV funding is available for discounted buy-to-let propert- ies so investors don’t need deposits.
Since the 1980s the role of bridging loans has developed and they are frequently used in commercial property transactions nowadays. They can be useful in a variety of situations, for example when developers purchase cheap land with little or no planning permission.
They can’t obtain traditional mortgages for the true cost of the developments without planning consent, but they can borrow against their existing property portfolios with bridging deals. Once full planning permission is in place, they can remortgage.
Bridging loans are often used by businesses to solve short-term cash flow problems. Typically they can use them to obtain capital injections to take advantage of growth opportunities, such as purchasing machinery or expanding into larger premises.
Bridging loan providers normally assess business applications on a case-by-case basis to determine their viability.
For this reason, standardised bridging products are hard to find as the interest rates and fees charged will vary according to risk assessments for each application.
So the bridging market has developed significantly in recent years and is outgrowing its reputation for taking advantage of vulnerable borrowers.
It now has a respectable role to play in the housing and commercial finance markets for a multitude of purposes.
Despite the improved image of the sector, it is important that providers and brokers take care to deliver fair products and good service.
Although the majority of bridging deals are commercial transactions and therefore unregulated by the FSA, providers would be wise to adhere to the principles of TCF if confidence is to be maintained.
The bridging market is expected to perform well in 2008 and may benefit from the prevailing market conditions in a number of ways.
This area of lending can meet the needs of customers when standard mortgage borrowing is not immediately available.
It provides opportunities for brokers who can benefit from the higher proc fees on offer and the likelihood of subsequent remortgage transactions.
Bridging loans and other areas of commercial finance can be complex and often need more work to meet the requirements of lenders.
And the commercial finance sector does not have standardised products either, so brokers new to the sector should ensure they have sufficient knowledge to meet clients’ needs.
In this light, inexperienced brokers looking to earn additional income by providing bridging loan services may benefit from using specialist commercial brokers to help them with cases.
Such brokerages often deal with bridging cases from start to finish but still pay introducers full proc fees.