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Dish of the day

As the mainstream market remains constrained, there’s growing appetite for bridging loans to plug the gap, which bodes well for the sector in 2011

GAVIN-DIAMOND.

GAVIN DIAMOND
HEAD OF FINANCE
CHEVAL PROPERTY FINANCE

With the reduced appetite of the mainstream mortgage market showing no signs of growing, bridging lenders will continue to make a significant difference. An ability to make flexible lending decisions based on the merits of cases, coupled with a desire to lend, has meant that bridging finance has become an important avenue to get transactions financed.

A growing number of the deals we are being asked to finance are the result of mainstream lenders requesting that their existing loans be repaid, notwithstanding sensible LTVs and plausible exit strategies.

If a deal doesn’t tick all the boxes, they are not prepared to lend or support existing loans, despite the fact that it makes sense on many levels. While this can be painful for borrowers, at least they can obtain a short-term loan which allows them to exit a transaction within their own timeframe and to their own specification rather than the one being demanded by their existing lender.

A recent example involved an individual in the process of building her dream home on land she had owned for 50 years. When an accident put building work on hold, the mainstream lender employed, at the borrower’s cost, a project manager who subsequently applied for a change to the planning permission.

The ability to make decisions based on the merits of cases has benefited sector

The borrower wanted to complete the build to her original design, but the lender was only willing to continue supporting the transaction if the build was done to the amended planning permission, failing which it would demand immediate repayment of the loan.

As the borrower had no means of repaying the loan, the property would have been repossessed and put on the market for sale in its unfinished state.

We met the borrower, her builder and architect to gain a thorough understanding of the remaining works and the time expected to complete them.

As a result, we were able to provide a bridging loan to repay her existing lender and allow her the time to complete the project to her specifications.

While the significant opportunities for bridging lenders are almost certain to continue, I think 2011 will see bridging companies attempting to differentiate themselves from one another in terms of products, lending criteria and quality of service.

This is becoming increasingly important as new lenders continue to enter the market, making the sector more and more competitive. This can only be good news for borrowers and brokers.

Vital part of brokers’ armoury

CHRISTIAN FAES
MANAGING DIRECTOR
MONTELLO BRIDGING FINANCE

The last few years have seen a period of volatility in financial markets. Bridging finance has also been through a period of turmoil, but now the market has turned buoyant – largely as bridging finance is seen as an industry that can capitalise on the current situation. Even though there are encouraging signs in the mainstream lending market, the credit markets are not going to come to life overnight. Mainstream banks remain
constrained by capital adequacy requirements and a legacy of bad loans. Conversely, there is a plausible argument to be made that the property market, especially residential, has stabilised. As a result, it is no surprise that bridging finance is seen as an investment opportunity.

The buzz phrase is old school lending where lenders take the time to look at borrowers’ circumstances

But setting up a viable bridging finance business is hard work. To attract quality loan applications, there needs to be considerable effort to develop and foster good broker relationships which takes time. In some respects mortgage brokers are the life blood of the bridging sector.

On the flip side, bridging is becoming an essential component in brokers’ arsenal. Many borrowers may come to a broker looking for a standard loan and find they actually need a bridging loan followed by a standard one. The buzz phrase seems to be ’old school lending’, where bridging lenders take the time to look at borrowers’ circumstances and the asset being lent against on a case by case basis. This is a crucial part of bridging finance but it takes time, experience and sound judgement. While bridging firms are under pressure to provide funding in a short timeframe, their method of assessing applications more arduous than traditional loan applications. We predict new lenders will enter the bridging space in 2011 and it will be interesting to see how they differentiate their offering. The obvious move we have seen is for some short-term lenders to become medium-term lenders.

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