Bridge of highs
The bridging loan market is enjoying a boom due to stunted lending in the mainstream mortgage market but experts predict business levels will ebb as the mortgage sector recovers.
Bridging finance is often used by borrowers who want to buy another home but have not sold their existing home. Other uses include those who are buying a home that needs renovating or where a borrower is buying a property at an auction and needs finance quickly.
Gross mortgage lending is expected to continue to stagnate at around £135bn to £140bn for this year and next and experts suggest borrowers are turning to bridging finance as an alternative to mainstream mortgage finance.
Brightstar Financial managing director Rob Jupp says: “We are in the middle of a boom. The sector has grown exponentially over the past 24 months and it has grown purely as a side-effect of wholesale funding not being available in the mortgage market.”
There are no publicly available estimates of the market’s size but bridging lender West One Loans estimates the market has just passed the £800m a year mark. Chairman Duncan Kreeger says the sector has not yet peaked.
He says: “We believe the sector is on the up and it is set to continue. I think the sector will continue to grow over the next few years while the banks continue to make life difficult, I do not think it is at its peak.”
There has also been a noticeable influx of new bridging lenders in the past 18 months. Kreeger says this is due to the good margins on bridging loans. He says: “It is a fairly simple business and there is a fairly high return for what we consider a fairly low risk.”
Some brokers are still wary of smaller, less established lenders and will only use bigger lenders with good reputations.
Emba group sales and marketing director Mike Fitzgerald says: “The danger is the more people who get into bridging the hungrier they are to get money and they might well lower standards. I think we would only go to the bigger, more established players if we were going to place a bridging case. I think once you start answering ads in the newspaper it is very dangerous.”
Despite the sector having had a poor reputation in the past, bridging lenders and those associated with the sector say it has become more professional.
Dragonfly Property Finance marketing and operations director Mark Posniak says: “Historically, the sector has had a bad reputation but I think that has changed. The market has cleaned itself up and looks to raise standards as a whole. But you will always get bad apples in any sector and the bridging sector is no different.”
Researching the bridging sector to provide genuine whole-of-market advice is a difficult due to the ever-increasing number of lenders coming to the market.
John Charcol senior technical manager Ray Boulger says: “Being whole-of-market in the bridging market is much more difficult than in the mainstream market, because you have new lenders popping up all of the time.
“For a small one-man-band, it is probably not going to be very efficient, because the amount of bridging business they are going to get is unlikely to justify the time they are going to need to spend exploring the market if they are going to give genuine independent advice.”
Intermediaries also have to remember bridging finance can be costly, with rates anywhere between 0.75 per cent and 1.5 per cent a month.
Lentune Mortgage Consultancy director Stuart Gregory says: “I think most people who ask about it do not appreciate what the costs are going to be and end up being pretty shocked by that.”
Posniak stresses the costs involved in short-term lending and bridging mean it should not be seen as a replacement for mortgages.
He says: “It is a competitive area and it is a great tool for the mortgage broker and IFA to have in the artillery. It gives them an alternative and it gives them hope of helping some customers but it is not a replacement for long-term finance.”
The mortgage market will not be in a depressed state forever and brokers say the boom will recede as the mainstream mortgage market recovers.
Gregory says: “I think it is one of those things where there will be a boom for a while but within two years, when conditions improve, it might become less prominent.”
Industry consultant Jonathan Cornell says: “It does seem to be going bananas at the moment but I think the sector will fizzle out in time and will return to sensible levels. Some of it is down to the fact that people cannot get mortgages from highstreet banks and are looking at other clever ways of getting money.”
But Kreeger says bridging has a role to play even when the mortgage market returns. He says: “There has always been a use for bridging even when mainstream lenders were lending. It is difficult to predict the future but I think the bridging market is here to stay.”