The evolution of bridging finance

Jo Edwards, Business Development and Marketing Director

The bridging finance sector has changed enormously over the last 20 years with both the product and the lending landscape evolving to serve a more diverse range of customers than ever before. Bridging finance has its roots in the 1960s when it was offered mainly by the high street banks and almost exclusively for house purchases only. The classic ‘bridge’ between a house purchase and a delayed house sale was seen as something of a last resort for many people, nowadays, however, it is often the funding of choice for sophisticated borrowers and professional property developers. With even more choice, lower prices and the potential for technology to make the process even quicker and cheaper for straightforward cases, there are exciting times ahead for those working in this vibrant and fast moving industry.

It took the best part of 25 years for bridging finance to break out of its ‘chain breaker’ pigeon hole. When the Housing Act of 1988 created the idea of the Assured Shorthold Tenancy it made buy-to-let much more attractive to amateur and professional property investors. Bridging lenders were approached to provide short term funding to enable their customers to acquire properties at auction and sometimes to fund the improvement works required to turn them into viable rental properties. Once works were completed the customer would exit their bridging loan with alternative finance in the shape of a longer term buy-to-let or commercial mortgage. Bridging finance gave the borrower a much quicker solution than a commercial mortgage or business loan and just as important it gave them certainty that barring any skeletons falling out if the closet during the underwriting, they’d be able to complete their purchase within the tight timescales demanded by the auctioneer.

The bridging market grew steadily throughout the 1990s with smaller providers entering the arena. Although parts of the sector were somewhat maverick, this was the period when bridging developed as a truly bespoke funding solution. The loans offered were unique to each customer, but there was a trade-off. For many people their perception of bridging was that it was high risk and high cost with the sort of lenders which couldn’t wait to seize properties when borrowers exceeded their terms. Nonetheless the sector continued to grow and received another boost in the early ‘noughties’ with the arrival of the ‘self-cert’ mortgage. These were the days of rising property prices and easy borrowing. Speculators bought and renovated houses with bridging loans, moved in tenants and got a self-certified buy to let mortgage to pay off the bridging loan. And then came 2007.

The credit crisis proved to be a turning point for the bridging industry. Many lenders suffered and the High Street banks virtually withdrew from the sector, leaving a void which some specialist lenders saw as an opportunity to secure an increased market share. As the industry moved out of the shadows, lenders and brokers came under greater scrutiny and professional standards were raised. New entrants brought increased competition and pushed down prices. As prices fell so the market grew and brokers and borrowers who previously dismissed bridging saw that its versatility and speed were now complemented by increasingly competitive rates and charges.

In March 2016, the Mortgage Credit Directive came into force with direct implications for the bridging industry. Loans secured on or connected to customers’ main residences fall within the MCoB remit and loans with terms over 12 months may also have to be treated as regulated with additional requirements. Although regulation is hardly ever given a warm welcome, the directive has been accepted as a positive bringing with it additional transparency, standardisation of information (with the issuance to regulated loan customers of the ESIS) and hopefully a better all-round experience for customers.

In the last decade bridging has become a thoroughly professional industry. Although Brexit will most likely see a review of all the legislation passed across the channel, the PRA has signalled that there’ll be no widespread ditching of regulation once the UK has left the EU. At present regulated bridging loans account for around 13% of the market (according to the ASTL’s Q1 figures) so the ‘classic bridge’ scenario now accounts for a small % of bridging loan transactions, a good signpost for the diverse range of uses for which bridging loans are now employed in a market with a book value in the region of £3 billion.

But what next for the bridging industry? Borro, whose core business is asset based lending, announced recently that they were leaving the bridging sector citing overcrowding. I wouldn’t be surprised to see more lenders which have perhaps added bridging to their product range rather than having a strong history in the sector, make the same call. I think bridging has become a sector where you can’t just dabble. Experienced operators have begun to carve out their own niches and differentiate their services.

Some lenders appear to be pitching their service towards the more complex end of the spectrum. They describe their offering as returning to the industry’s ‘completely bespoke’ roots where they don’t publish a rate card and instead price every case individually for overall risk rather than according to LTV bands. It’s an interesting position to take. Most brokers know roughly what a lender will be looking to charge when they submit a proposal, even those lenders which say they don’t have a price list, plus they know the ones which will be prepared to negotiate if the LTV is at the higher end but the customer and the security is gilt edged. As such, many of the better-known bridging and specialist lenders still negotiate on rates for better credits, but what some lenders appear to be signalling is that they’re not so interested in competing in the ‘vanilla’ space where margins are thinnest.

We are so confident that there’s a huge opportunity for those with the right skills, experience, resource and technology that we’ve recently recruited four new BDMs to take UTB’s bridging products to more brokers in more parts of the country than ever before. The percentage of brokers who regularly deal with bridging loans is still very small and a vital next step in developing the market is building relationships with brokers new to bridging and encouraging them to add this extremely versatile and competitive product to their consideration list when advising clients with a broad range of requirements.

The use of technology has transformed the mortgage industry with most providers having developed portals for brokers and/or customers which help to streamline the application process and underwriting through to completion. Although there’s some debate about the over use of technology sometimes being more of a hindrance than a help, when done well an automated system with human checks and balances can be a huge benefit to all parties. Time savings can lead to happier customers and simplified administration can reduce costs, the benefits of which can be passed on to the customer in the shape of even more competitive rates and charges, a real win-win. Bridging is traditionally seen as a product which requires close human involvement from the very start and it’s true that some cases require the full ‘bespoke’ treatment from Day 1. However, as the customer base for bridging and short term secured finance grows, so too will the percentage which could be viewed as being relatively straightforward.

UTB has become known as the lender which deals with everything from the everyday to the extraordinary and it’s our experience of dealing with the former which has prompted us to think about the opportunity for employing technology to speed things along when human intervention isn’t necessarily required. That’s not taking a ‘computer says no’ approach but more a ‘computer says yes so let’s crack on’ or alternatively ‘this one needs a closer look’. Clearly any level of automation for a product which for years has promoted itself as being completely tailor made needs careful thought, but if a reasonable proportion of ‘vanilla’ cases could be transacted more quickly and at a lower cost than is achievable presently, then the argument for some degree of digital processing and underwriting in bridging finance is surely a compelling one. When bridging finance was first conceived computers filled an entire room. Now, half a century on we carry greater computing power around in our phones but the process of arranging a bridging loan has remained virtually unchanged. Perhaps that has been by design. It made sense for providers of a bespoke product to promote their service as the most bespoke of all, automation was a dirty word. But now, although the bridging market is still very small compared to mainstream mortgages, there is considerable potential for growth and the industry should facilitate and encourage that by evolving the service to meet customer needs. If the market is to keep growing and if the bridging finance sector is to continue to thrive that will mean being bold in the implementation of new ideas and new technology.