Bridging finance has been with us for some time, but first emerged as a specialised form of mortgage finance in the 1960s.   Up to then, most of what we would now call “bridging finance” was advanced by mainstream banks and building societies, as well as firms of accountants and solicitors.   However, banks were subject to restrictions in the 1960s which only allowed them to provide funding for home purchases (and, later, “home improvements”).  Therefore, the only real bridging was for people moving home, where they had exchanged contracts for their former home, but needed short-term funding to bridge the gap until proceeds were received.


The gap in the market was picked up by specialist lenders, many of which were owner-run.   For example, Commercial Acceptances (now part of the Close Brothers Group) was originally run from the home of a director.  The sector remained small for a number of years.  In 1988, the Housing Act created the concept of Assured Shorthold Tenancies, which gave impetus to the buy-to-let market and provided opportunities for bridging lenders to lend money on a short term basis to people refurbishing properties to be suitable to let; or buying suitable investment properties on auction.


In the days when obtaining bank or building society financing was a slow and laborious process, bridging lending offered a speedier solution.  This is however, not the only area where bridging lenders score.  They provide certainty, with a quick offer of funding, which is subject only to no undisclosed adverse factors being discovered during the underwriting process.  Also, the customer knows that, if the answer is negative, the lender will say so up front.  In addition, bridging lenders only charge fees for completed transactions, so the customer is only liable for his or her legal and valuation costs.  Added to this is the knowledge that each case will be treated on an individual basis and not be subject to rigid and often unattainable lending criteria.


The rise of “self-certification” led to a rapid increase in the bridging market in the early 2000s, especially as it was accompanied by fast-rising property prices.   This enabled buyers to fund purchases with bridging loans, renovate and tenant properties and then obtain long-term finance based on increased valuations, often effectively financing full costs.   Money was freely available, with long-term lenders competing for the business.  


In 2007, the collapse of Northern Rock and the credit crunch resulted in a difficult time for bridging lenders, as it was for long term lenders; however it simultaneously offered bridging firms a golden opportunity to establish themselves as almost overnight as banks reacted to the changed circumstances by restricting lending.  This opportunity was seized, and the sector has moved from strength to strength ever since.  

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In March 2008, 19 bridging firms got together and formed the Association of Short Term Lenders.   As can be seen from the chart above, lending by members has grown year on year, reaching a total of £2.7 billion for the year ended March 2016.    On this basis, the bridging market is estimated to be at least £5 billion a year. Although mainstream banks have extended some funding to bridging lenders, they have continued to remain outside of the market.   The recent vote for Brexit has, if anything reinforced this situation.

The role of the ASTL


The ASTL has been instrumental in the increased professionalism of the bridging finance industry.   It has set high standards which members need to meet.   It has provided insight into the industry to HM Treasury, the FCA and FOS, as well as liaising with broker organisations such as the NACFB and AOBP.  


Rather than the raising of standards putting lenders off, it seems to have raised the appeal of being a member, with membership seen as being a ‘kite mark’ seal of approval and in the past year membership has increased by 24%.   ASTL members now range from banks to small operations.   Individual loans range from many millions (a member recently wrote a £38 million loan) to sub-£50k amounts.  The ASTL actively promotes dialogue between members through formal and informal meetings, and provides both access to anti-fraud programmes and compliance advice.   Membership has steadily increased and currently stands at 36 lender members and 25 service providers who have joined as associate members.


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What is bridging used for?


The uses of bridging have moved far beyond the classic one of providing breathing space for home purchasing where there was a chain break. Bridging also has moved beyond the nine month traditional term; often loans, particularly for refurbishment or conversions, have longer terms in order to provide borrowers time to complete and sell or refinance projects.


The purposes of loans are many and varied and do not necessarily have to be for property investment purposes.  Bridging loans are used to allow borrowers to take advantage of commercial opportunities, such as purchasing shares in a business; building up stocks prior to seasonal orders; or even, in one case, buying gold in order to fulfil a sculpture order from a wealthy middle-Eastern client.  The speed and flexibility of bridging loans enable borrowers to make decisions which the slowness and complexity of bank loans would render impossible.


A key factor is that, unlike some other loans, bridging loans can be redeemed before the end of their term without penalty.   This is ideal for borrowers who are liquidating other assets, or who hold investments which would incur penalties for early withdrawal.   Once customers are in funds, they have the option of repaying all or some of their loan before expiry of the loan term.


Many smaller builders find bridging finance to be suitable to their requirements.   Creating a relationship with bridging lenders, they can draw on flexible arrangements without lengthy meetings and complicated legal agreements.   Existing property portfolios can be used to fund purchases and development.


The expansion of permitted development projects has led to the conversion of many commercial premises to residential use.   Bridging loans can help in the initial stages, with longer-term funding provided once the project is under way.   Many short term lenders also have a product range which includes development finance, enabling bridging loans to be ported into development ones.


These lenders have also been innovative, with new products coming on stream.  Essentially, if there is a property asset, funds can be advanced to meet requirements of borrowers.


Bridging also enables customers to complete auction purchases, or meet payment deadlines when other promised funding does not materialise.   Other uses include consolidation of sites prior to development, major refurbishment of properties, supplementing of development mezzanine finance, enabling sitting tenants to purchase property at below market value, etc.   The essence of bridging is the ability of the lenders concerned to understand the issues involved and provide funding where mainstream lenders cannot as they are geared to standard products and a “computer says no” attitude where something is outside the norm.


Bridging is not just restricted to property developers either; businesses may also use bridging to either purchase the premises in which they operate, or to use those premises to fund their business.   Either way, bridging can be used in a number of innovative ways until long-term arrangements can be finalised.


In short, bridging enables things to happen – it needs to be viewed as a cost rather than as interest.   It is not a long-term solution; it is a short-term answer to a requirement.   In many cases, the alternative is not to do anything, and let a lucrative opportunity pass by.


Compliance


Contrary to what some people think, bridging loans to owner-occupiers (and, now, consumer landlords) are subject to regulation, including the recently promulgated legislation incorporating the European Mortgage Credit Directive, despite there being some significant exemptions.   However, as interest on many bridging loans is not payable until redemption, the affordability requirements do not always apply.   Members of the ASTL are, however, subject to a Code of Conduct, encapsulated in the ASTL’s Value Charter.

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There is no doubt that, as the bridging market grows; regulation will increase, despite Brexit.   A recent consultation document issued by the PRA indicates that there is a political will to restrict Buy-to-Let funding, not just to individuals, but also to corporate entities.  Indeed, it will be interesting to note whether the current growth of corporate property investment will attract the attention of the regulators.


Current trends


 Bridging interest rates have reduced considerably in recent years, increasing the attractiveness and affordability of bridging loans.  The current low rates of interest look like they are here to stay for a while yet.   Inevitably, investors will look to possibilities of earing higher returns, and new entrants continue to be attracted to the market.     The entrance of challenger banks, such as Shawbrook and Aldermore, as well as the growth of many of the existing lenders, has also been a feature of the market.   These firms offer a variety of loans, including longer-term offerings.  


Many lenders, however, are fairly small, often funded by high net worth individuals or family offices.  A significant number of these are well run and staffed, with owners controlling credit risk effectively.   However, many will have their fingers burnt as they do not necessarily understand the risk, nor have sufficiently experienced staff and management.
Bridging is not risk-free.   Fraud is a major problem, especially for new entrants who may be regarded as easy targets by fraudsters.   Recently, there was also a rise in re-bridging.  Lenders need to investigate carefully why the originally proposed exit routes were not achieved.  Loans secured by commercial properties need to be assessed taking into account local conditions while retail premises are vulnerable to changes in traditional shopping patterns.


What of the future?


As the rhyme goes “Roses are red, violets are blue, I don’t know what’s going to happen and neither do you”.  The last credit crunch and its aftermath saw several firms cease to trade.   Also, there is the danger, as with Northern Rock, that those firms who are reliant on outside funding lines may find these taken away with very little notice.   Any major downturn in property values or further tightening of the refinance market could cause problems.   However, the long-term outlook is positive.   Bridging finance is here to stay, and will continue to be an important financial tool.  Where appropriate it will enable customers to take advantage of opportunities which would otherwise be missed.


The ASTL’s conference, to be held on 22 September, entitled “Lending in an uncertain world” will provide delegates with an insight into the current political, financial and economic trends and how they impact on the world of property.


Benson Hersch, CEO of the ASTL


This article was published in the August edition of the Mortgage Finance Gazette