Market commentary: Bridging loans

Written by Oliver Wade

The bridging loan product has continued to grow in popularity since 2011, when the market was valued at £750m in the UK. Today, however, it is roughly estimated to be at £5bn, according to the Association of Short Term Lenders (ASTL), representing a huge increase in the demand for short-term lending as many homeowners, first-time buyers and buy-to-let landlords take advantage of low interest rates.

Masthaven short term lending managing director James Bloom says that the bridging market is currently “booming” and he doesn’t see any sign of it slowing down, stating that the value of the market “underscores just how significant a need there is for this kind of short-term finance”.

“Bridging is often referred to as a niche lending area – but really, it’s time to start thinking of it as mainstream. Gaining ground and reputation, bridging finance is emerging as a viable source of lending for borrowers,” Bloom adds.

This trend is set to continue during the first half of 2018. Despite the spectre of Brexit looming, Bloom states that many bridging lenders expect that the UK’s departure from the European bloc “won’t dampen things”. This forecast is further supported by the ASTL, reveals that 50% of bridging lenders are “optimistic” about the long-term prospects of the UK economy, while 75% expect bridging volumes to grow in the first six months on 2018.

This expectation is also echoed by LendInvest chief commercial officer Matthew Tooth, commenting: “The bridging market will continue to grow as the interest rate reductions made by lenders last year feed through. As it gets cheaper, bridging finance is increasingly attractive as project finance for property refurbishment and improvement projects. Bridging providers will often support complex and bespoke arrangements that mainstream lenders will not fund.”

However, OneSavings Bank sales director Adrian Moloney does not expect the bridging market to decline in popularity over the second half of 2018, as statistics from ASTL illustrate that the demand for bridging loans grew by almost 40% between Q3 2016 and Q3 2017. Moloney stated that there is “clearly an appetite” amongst brokers for “tailored” products that help their clients’ bridge quickly.

“2018 is promising more of the same as recent changes to EPC regulations came into force in 1 April could help landlords make the required changes to their properties, especially for those that don’t have the capital available. Similarly, the forthcoming changes to licensing of HMOs in October this year could further increase demand for bridging as some landlords will need to make adjustments to their property or for investors looking to increase their portfolios by acquiring properties from those who are unwilling to,” adds Moloney.

Furthermore, Enra Group marketing director Tim Jackson reminds us that the bridging product itself has proven to be “highly adaptable”, applying itself to an “ever-wider range of needs and uses”. Jackson adds that this adaptability has allowed the product to “exploit” new niches and opportunities by providing borrowers, particularly property professionals, with alternative means to fund their projects.

Regardless of the state of the economy, Jackson believes that bridging products will continue to advance, although acknowledging that economic challenges are “likely” to moderate growth.

“We believe there is plenty of scope for further expansion of the bridging market since there are still fundamentals suggesting that needs will continue to emerge for bridging to address. For example, more houses need to be built and government sees SME developers as key to that, yet getting small-scale funding remains their biggest challenge. Bridging is a great option for smaller renovation and conversion works, so will continue to be used to fill that funding gap,” Jackson says.

Bloom said that he can only see bridging going from “strength to strength” as it transitions into the mainstream and becomes more accessible, increasing the demand for the product. Despite this, Bloom stats that the two “major” challenges for the market will be competition and innovation.

“Lenders are flooding onto the bridging market at a rate of knots, so it’s the ones who can innovate, developing new products attuned to the needs of borrowers who will flourish.”

However, Jackson says that while competition in the sector continues to be “strong” due to bridging rates and costs remaining low, borrowers will benefit from a “healthy marketplace”.

“Providing the industry maintains a prudent lending stance – particularly in terms of sensible LTV levels – and doesn’t ‘chase returns’ by going up the risk curve, we expect the industry to be in a strong, sustainable position to continue growth,” Jackson concludes.

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