Bridges at 85% LTV: A great way to lose money?

At the recent AOBP AGM, a heated debate kicked off when the panel of industry lenders were asked if they would lend up to 85 per cent LTV in the next 12 months. Since then, further market members have come forward, where one labelled it as a great way to lose money.

Many figures who talked to B&C said that LTV’s reaching the 85 per cent mark could be seen as reckless, however some believed that with additional security, it is likely that some lenders in 2015 will be offering products at this level.

Believing that an 85 per cent LTV would be a negative addition to the market, Mark Posniak, Head of Sales & Marketing at Dragonfly Property Finance commented that his lender wouldn’t lend at that ratio without additional security. “To lend at this level on its own is incredibly reckless and a great way to lose money,” he said.

“I think it’s very irresponsible and risky,” he added, stating that he can’t imagine seeing much of this level of lending in 2015, “unless lenders are desperate”.

Also agreeing, Kit Thompson of Brightstar Financial said: "I do not consider 85 per cent LTVs [as] sensible lending when talking about bridging finance, with rates typically five times higher than standard term lending (i.e. mortgages) and the risks of default to the client are that much higher.

"From a lender’s perspective (although obviously I do not work for a lender), if a first legal charge is secured at this high LTV and the borrower defaults, the chances are the property will have to be sold via a ‘forced-sale’ which is typically at auction and restricted to a 90 day sale period. This means the property will typically sell for 15 – 20 per cent less than the open-market value. In short, a lender would find themselves ‘under-water’ with no available equity. Add to this, legal fees, court fees, default interest and penalties and there is no way they will get their money back

"I do not think we will see 85 per cent LTV lending any time soon in bridging and if we did, it would almost certainly end in tears!"

Paul Wertheim of Mint Bridging stated that the firm does not want to ever again see the days of 110 per cent mortgages from Northern Rock, including an 85 per cent LTV. “This would certainly effect the borrower's ability to exit the loan, and would be reliant on lenders who gear highly,” he added.

Steven McColl of Soho Corporate commented that lending with an 85 per cent LTV is too high, adding that it leaves the lender with no room for error.

“If the borrower has additional security and meaningful PG, then of course it’s doable and is already happening,” he suggested. 
However, Steven believes that there will not be many lenders advertising 85 per cent LTVs next year, “unless it’s a headline-grabbing marketing ploy”.

“We saw this pre-recession and those offering these levels inevitable dropped out the market when things took a turn for a worse. Several years later and we are seeing history repeat itself,” commented James Bloom of Regentsmead.

“In this market, in our opinion, lending at 85 per cent would leave a lender immediately under water if they had to take back a property.”
James added that he predicts one or two lenders may lend at this level in 2015, mainly down to new lenders aiming to fit into a gap in an already overpopulated market.

Bob Sturges of Omni Capital stated that his firm does not predict a general move in this direction over the next 12 months, and it would not welcome one.

“We're aware that some short-term lenders already lend up to 85 per cent. Such decisions are usually taken on a case-by-case basis, rather than as part of a formal criteria structure, and involve taking a 'common sense' approach to the facts presented and the risks involved,” he said. “For experienced lenders, it can work; for less experienced ones, it can be disastrous.”

Bob added that with treasury and regulatory pressures amongst others playing a big part in the market next year, it is a brave or “foolhardy” lender who “pushes the lending envelope beyond where it should prudently stretch”.

Commenting that it can be a safe product was Yasin Patel at Mayfair Bridging said: “Given the right client and deal, lending up to 85 per cent LTV can be responsible.”

With a view that an 85 per cent LTV bridging product could be responsible under certain circumstances, Andrew Bloom of Masthaven Bridging Finance believes that even though it will not be advising 85 per cent LTV bridging products within the next year, at times, when there has been a guaranteed exit route, it has lent in excess of 85 per cent LTV.

“As a general rule, I feel 85 per cent LTV is foolish, but for the right applicant, right property, right exit route, then on these occasions, lending at 85 per cent would be safe,” he said.

“Next year, some lenders may start advertising 85 per cent LTVs, but only a tiny number of loans will actually be written at this level.