Many years ago, bridging was viewed as very much a last resort, a somewhat shady sector filled with unsavoury characters. Over the years, of course, the industry’s image has improved considerably, thanks in no small part to the work of those involved by cleaning it up.
Indeed, bridging has almost become mainstream. The economic crisis which left most high street lenders so risk averse – that, for a time, it was almost impossible to get them to lend –proved hugely beneficial for bridging. Consumers began to recognise the benefits of short-term finance in closing deals on time. The flexibility and bespoke approach bridging lenders could take appealed to those borrowers left facing an uphill battle with high street lenders’ increasingly stringent criteria. Bridging had come into its own.
Last year alone, approximately £2.5bn worth of loans were written, and according to figures submitted by members of the sector’s trade body, the Association of Short Term Lenders, the value of loans written in the three months to September 2015 increased by 2.7% compared to the previous quarter.
This growing demand for bridging loans is the result of a range of factors. With consumer and developer confidence high and property becoming a top priority for professional investors –again, thanks to rising house prices – the need for quick and accessible finance is clear.
Bridging enables people to achieve things which otherwise would not happen. The loans may seem more expensive but that cost is an enabling cost – the lost opportunity for making a profit or achieving an objective can be much more detrimental than the enabling cost of a bridging loan.
It is often the only way to get a project up and running – ready for either long-term refinance or sale – and is increasingly used for a number of purposes, by those in the know, over and above buying a house before the last one is sold. It is particularly popular with developers wanting to capitalise on opportunities.
And this demand has resulted in a substantial rise in the number of lenders offering bridging products, both existing and new.
The sector could benefit further from the regulatory changes currently taking place in the wider mortgage market. From 21st March, when the Mortgage Credit Directive (MCD) rules come into play, lenders will take sole responsibility for assessing the affordability of borrowers. It’s fair to assume that the application process for mortgages is set to increase as lenders conduct strict affordability checks in order to remain compliant.
Despite this opportunity, the MCD also brings an element of concern for unregulated lenders and brokers. That’s because there is still some confusion about which areas of the unregulated market will become regulated as part of MCD.
The challenge for unregulated lenders and brokers is when a loan that initially appears to be an unregulated one is suddenly discovered to be regulated after all. For example, a person needs to move and decides to let his/her home in order to allow time for proper marketing. If that person does not have another investment property, he or she would be classified as a “consumer landlord” and any mortgage on the property would be subject to regulation.
The MCD definition of bridging, which will apply from 21st March 2016, states that a bridge can be either a regulated mortgage contract or a credit agreement of no fixed duration or repaid within 12 months.
The definition specifies that the loan must be used by the consumer as a temporary financing solution while transitioning to another financial arrangement. To remain exempt from the MCD, the bridging loan must meet the new definition.
The regulator does not expect any bridging loans which currently meet its definition to fall outside the scope of the MCD’s version of a bridge. But it says it wants to hear from bridging lenders and advisers of any instances where this may occur so it can be reviewed.
I personally don’t think that the implementation of the impending MCD rulings should adversely affect the bridging market. Lenders are clearly geared up for broker confusion so, while we may see a temporary lull in enquiries, these should be nothing more than teething problems.
The message is clear and concise. If we adopt the exact same process pre-MCD to the enquiries we receive post-MCD, then hopefully, and very quickly, the fear of changes in regulation and process will rapidly fade away.
Attributed to Marc Biddle, Commercial Manager at Promise Solutions
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