Andrew Fisch, Managing Director at bridging specialists Ranncorp, assesses whether bridging lenders are taking on too much risk
In the face of faltering demand and increased economic and political uncertainty, it has been clear to everyone over the last 18 months that properties are taking longer to sell.
This month, Halifax announced that in the three months to July, British house prices rose at their slowest pace in more than four years. Despite the seemingly inexorable decrease in unemployment, inflation has continued to outstrip wage growth. This resultant squeeze on consumer finances has manifested itself through rising household debt, which is forecasted to surpass the pre-financial crisis peak next year.
Combined with new stamp duty charges, house prices have become increasingly unaffordable, and as a result in certain areas – particularly London – the property market is in a state of paralysis. This stalemate, between sellers still expecting to sell at peak market rates and buyers offering substantially below, shows no signs of abating. This has hit estate agents in the pocket, with Foxtons recently reporting a fall in first-half profits of 64%.
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As a result of this background, and constrained by post-recession regulation, caution continues to be the watchword for mainstream banks. Their appetite for riskis especially low, reflected in historically low loan-to-value (LTV) levels. As a result, bridging finance – short-term secured loans designed to bridge a temporary cash shortfall when buying a property – has surged into mainstream consciousness, becoming an attractive alternative for those seeking to buy property. This newfound appeal has been enabled by the dramatic contraction between bridging rates and mainstream bank lending rates over the past few years. Thus, while the mortgage industry is slowing, this once-overlooked sector of the market is booming.
Increased demand has resulted in a plethora of new players entering the arena and, as a result, the bridging market has become increasingly competitive over the last five years.This competition has meant drastically lower lending rates, in addition to higher LTVs.
While lenders competing aggressively to secure loans has provided concrete benefits to consumers, there are inherent risks involved. Lower lending rates, higher LTVs and a softening and illiquid property market are a dangerous combination for lenders, who can suffer substantial losses as borrower defaults increase and lenders’ exit routes dry up.
I recently commented on how the case of Boris Becker’s bankruptcy could have been avoided had he looked to bridging finance as a temporary solution, while he re-mortgaged his multimillion euro Majorcan villa. However, there is a danger posed by borrowers who, unlike Becker, have outstanding debt greater than the open market value of their property – some of whom we have been approached by – and whose loans currently sit on lenders’ books presumably as unrealised losses.
Other risks to bridging lenders include short cuts in legal and identification checks, as lenders are increasingly coming under pressure to complete in a very short timeframe, often with assets that may have planning or title issues. Bridging financiers always need to have as much knowledge as possible relating to the proposed transaction, includingpurchase price, planning situation, costs and the experience of the borrower and an exit strategy.
The importance of knowledge also reflects another common mistake made by bridging lenders. Most of the new firms have entered into the bridging finance market with a particular niche in which they specialise. The danger is that these firms get carried away and expand too quickly into areas of finance outside their area of expertise, in the process putting their whole business at risk through bad loans that may not be repaid. In order to maintain their competitive advantage, bridging lenders must stick to what they know.
Although the economy is currently faring better than many expected, bridging lenders must be wary of hubris. Bridging has a vital role to play in the mortgage market, and a bridging loan can be an extremely useful financial tool. However, if bridging lenders desire a long-term future in, and want to be considered part of, the mainstream UK mortgage industry, they must adhere tothe principles of responsible and disciplined lending.