By Alan Margolis – Head of Bridging – United Trust Bank
The discussion of bridging loans doesn’t usually lead one into the realms of philosophy, but this was recently the case over a lunch I had with Mortgage Strategy Editor Paul Thomas.
Not unexpectedly, the conversation had turned to how large the bridging market is, with the consensus of the table being that it was almost certainly greater than £2bn as supported by the Association of Short Term Lenders (ASTL) figures.
Whatever the figure, it is safe to say that the market has expanded significantly in recent years, with the success of the UTB bridging Department being a good example. However, the fact remains that compared to the UK’s mainstream mortgage market, which is estimated at being over £200 billion a year, the bridging market is really quite small.
Notwithstanding this, I ventured to Paul that the paper value of the bridging loans written is far exceeded by their worth to the greater economy as a whole, and that bridging loans therefore punch far above their weight relative to some other forms of lending and finance. I shall endeavour to explain this hypothesis.
Whilst not downplaying the value to the economy and society as a whole of regular ‘High Street’ mortgages which after all have spread the benefits of home ownership to many more people in the post war era, it’s not unfair to say that these mortgages form part and parcel of regular property market activity to which we have become accustomed.
However, nearly 20 years of experience of short term lending has given me a different perspective. Such is the sheer variety of uses of bridging loans and the sometimes astonishing backgrounds to and circumstances behind many of the loans that I have encountered over the years, that I would say bridging loans add more value than just the nominal figures on paper. That’s because they are very often enablers or facilitators and that “things” or “events” that otherwise would not have happened, do so because of the successful use of bridging loans.
Let me give you some examples which illustrate my point.
Take first a situation that will be increasingly common across the UK in coming years, namely mature borrowers wishing to downsize. According to the Prudential, almost 2.5 million ‘last time buyers’ being current home owners over the age of 55 plan to downsize their homes. At UTB we see many cases where such borrowers need or want to complete a purchase before they can sell their existing larger property. They don’t need a long-term mortgage because the surplus equity in their home will repay the loan and also, they won’t qualify for a mortgage by virtue of their age. A bridging loan enables the downsizers to achieve an ambition that might otherwise have not been realised. Further “added value” may often come because the downsizers have moved to be closer to their family. That outcome is impossible to value in monetary terms, but is socially very important.
Another example is where a developer has completed a project and now wishes to start on the next one before the recently completed development has realised sufficient funds to enable them to do so. A bridging loan can help repay any outstanding balance of the development finance and help start the next project thus bringing forward work for contractors and suppliers and stimulating economic activity.
There are of course unusual cases where the benefits are very much personal though no less valuable to the individuals concerned. For instance, we assisted with the settling of an acrimonious litigation and bridging loans have assisted with the divorce settlements. These loans have helped people move on with their lives and again would be hard to place a true value on.
It’s pretty much a truism that purchasing a property is one of the most stressful experiences in life. And for many, much of that stress is associated with the property chain where a difficulty with just one part of the chain can cause enormous stress for all the other parties. A “Chain Break” bridging loan usually secured against a chain member’s existing and new property can enable the chain to complete whereas otherwise it might have collapsed. Here many parties may stand to benefit from a bridging loan without even knowing it.
And so it goes on. Bridging loans used to gift deposits to grandchildren to enable them to start their lives as homeowners; enabling families to deal with issues arising out of inheritance where loans are made against inherited property so that perhaps some beneficiaries can take cash out of the inherited property whilst others may wish to hold it pending renovation or just refinance once ownership is settled; sometimes just to provide for temporary living expenses or cash flow pending the sale of a property.
For many of our customers whose loans range from the most complex involving multijurisdictional and /or multiple ownership structures or where commercial property is the security, to the simplest “Classic Bridge” the taking out of a bridging loan was the enabling factor from which benefits flowed.
It is easy to be cynical about our sector, and it’s by no means perfect, but properly and responsibly used with a viable exit strategy, short term bridging loans play a valuable role in the lives of an increasing number of people and businesses; small in absolute terms compared to mainstream mortgages, of course; valuable beyond their mere monetary measure, you bet!