It saw a huge growth in the number of lenders and brokers involved in the market. It was also notable that the quality of the participants in the market improved significantly through the year (perhaps encouraged somewhat by new regulation). Bridging providers developed both the range of products on offer to borrowers and their sources of funding (most importantly, with several lenders gaining banking licences to allow them to tap into cheap savings rates).

While 2017 has – at least for Funding 365 – got off to a flying start, I can’t help wondering if this year is going to see a dramatic slowdown in traditional bridging lending. Importantly, I want to differentiate between bridging lending and development lending – as I believe that the latter is going to see continued growth given the structural deficit of properties in the UK (particularly in the South East).

There are a couple of changes that have occurred in the market which could result in a marked slowdown in the need for traditional bridging finance. First, the increased stamp duty levels have – particularly in the South East – made a traditional property ‘flip’ (ie light refurbishment and sale) a difficult proposition given the extreme purchase and sale costs. To counter the increased purchase costs, we have seen investors over the last year try to squeeze value out of property refurbishments by adding the property to their existing buy-to-let portfolio rather than sell it. We have also increasingly seen investors looking to convert the property into an HMO or student accommodation, which are typically higher-yielding investments.

•   Funding 365 reveals short-lease bridging product
•   Ingard adds Funding 365 to bridging panel
•   Ex-Goldman Sachs head joins bridging lender

The second change that has been seen this year – which could interact with the above stamp duty constraints to cause a significant negative effect on property investors – is the increased affordability hurdles for buy-to-let mortgages. 

Changes in the buy-to-let sector are likely to impact bridging 

In today’s market, buy-to-let mortgage lenders need (typically a minimum of) a 125% coverage of a mortgage rate that is assumed to be at least 5.5% (although there are lower stress test levels possible if a borrower is happy to take an initially more expensive five-year fixed rate mortgage). To clarify the numbers behind this, buy-to-let lenders are saying that a property rental income must at least cover an interest rate of 6.875% on your loan amount. Therefore, if your property yields 3.44%, the maximum loan to value (LTV) mortgage you can get is 50%. If the rental yield on your property is only 2.1% (which mine in south-west London is), the maximum LTV reduces to 30.5%. This could have a very negative effect on buy-to-let property investors’ ability to conduct future business. Importantly, it could also have a materially negative effect on bridging lenders who have customers who now can’t exit a bridging loan due to the increased affordability hurdles.

To further rub salt in the wound, buy-to let lenders have also restricted the avenue to higher-yielding property types such as HMOs and student accommodation by increasing affordability stresses to as high as 8.5-9%.

Additionally, let’s not forget that this year will also see the start of the removal of tax deductions for mortgage interest on buy-to-let mortgages (for individuals). This may be the psychological straw that breaks the camel’s back as properties move from profit-making to loss-making.

What the summary of the above says is that regulation and tax have made it more expensive to buy a buy-to-let property, more difficult to get a buy-to-let mortgage and potentially not profitable to hold on to it. It isn’t a great pattern for growth of the sector.