The bridging sector continues to be one of the mortgage market’s success stories of the past few years.
An influx of new lenders has pushed rates down, in turn bolstering the sector’s appeal and shedding the image it once had of last-resort lending.
A healthy appetite from investors and entrepreneurs has also aided growth, so where does the sector go from here?
“From a lender’s perspective, there seems to be more money available to lend than ever,” says SPF Short Term Finance director Amadeus Wilson.
“A number of private equity firms have targeted the bridging market, resulting in a lot of new entrants with fairly similar propositions to the more established firms.”
Wilson believes the sector provides “juicy” returns with a relatively low barrier to entry — especially on the unregulated side.
Bridging is so competitively priced these days “The opposite would be said of starting your own bank from scratch, for example,” he says.
The varied uses of the product are no doubt increasing the sector’s appeal to investors.
“Borrowers are using bridging for buying at auction, with the number of completions in this area higher than ever,” adds Wilson. “Others are using it to improve property or for converting to different class use, such as turning a family home into an HMO [house in multiple occupation] to help increase yield.”
According to Pink Pig Loans director of bridging and development Luke Egan, the wide choice of lenders is also breeding competition.
“We see more and more lenders moving towards refurb and hybrid development bridging products to allow potential developers access to funds, with the best characteristics of two very important products: bridging and development,” he says.
Continued, sustained and sensible growth is something that we all want, and I think we will deliver it in the next year
The growing demand for bridging is reflected in the latest figures from the Association of Short Term Lenders (ASTL). Bridging completions totalled £1.1bn in the second quarter (Q2) of 2021— an increase of 23.2% on Q1.
Applications fell by 1.7% to £7.36bn but, overall, for the year ending 30 June 2021 they were still 26.9% higher than in the previous year.
ASTL chief executive Vic Jannels believes the sector is performing very well.
“Not only is the market continuing to grow and show signs of ongoing recovery as we emerge from the pandemic, but the increase in completions also represents improving conversion rates, which is good news for brokers, lenders and customers,” he says.
It is encouraging to see more people taking a real interest in bridging and we applaud this
As well as conventional uses of bridging finance for property refurbishment and HMO conversion, there has been increased use of regulated bridging to beat the stamp duty deadline, and also as a result of product innovations.
Jannels adds: “We are also seeing growing demand for development exit loans because many schemes are taking longer to complete.”
Moving into the mainstream
The increase in lender competition has sparked a rate war in the market. Figures from Moneyfacts show monthly bridging interest rates started at 0.39% in October.
Wilson says there is so much money available to lend that there is not a big disparity in pricing.
“If one lender won’t agree to lend at a certain price, there are likely to be other options at similar price levels,” he says. “Fewer people are reeling in horror when you mention pricing because bridging is so competitively priced these days.”
The increase in completions also represents improving conversion rates, which is good news for brokers, lenders and customers.
Such low rates are one of the main causes of the sector’s growing success.
“Bridging has traditionally suffered from a bit of an image problem. We still have some legacy issues, but I think it’s going in the right way,” says Egan.
“Rates have never been lower, which makes it more attractive to mainstream advisers and clients, and there is a lot of investment in fintech designed to make consumers’ lives easier and everything more accessible,” he says.
“More mainstream brokers are taking on some of the simpler transactions themselves or realising they can still earn money just by referring deals to a packager,” he adds.
Making sure advisers recommend the right product for the right reason needs to remain a focus
This is a trend Together has also witnessed.
“Brokers are becoming better educated and more knowledgeable in providing the right financial solutions for their clients, and bridging can provide an answer when speed is of the essence,” says Together specialist account manager Lorenzo Satchell.
“We’ve seen more brokers entering the bridging space over the past few years to make sure they can provide their customers with as wide a set of options as possible in the face of fierce competition. Bridging should definitely be in every broker’s toolbox,” he adds.
As with any flourishing sector, brokers need to remain vigilant.
The offer and legal processes can be quite different from those of traditional mortgages
“Any product that has a process where advice is given by a third party is open to scrutiny because people will not always agree on what ‘Best’ looks like if it’s not as simple as ‘Lowest rate wins’. There are other customer requirements to consider,” advises Egan.
“Making sure advisers recommend the right product for the right reason needs to remain a focus. It’s not just about proc fees or the path of least resistance,” he warns.
The ASTL is working with the Financial Intermediary & Broker Association to deliver an educational programme for brokers to help with their understanding of bridging.
“It is encouraging to see more people taking a real interest in bridging and we applaud this,” says Jannels. “A word of caution, though, to make sure all aspects of the process are fully understood because the offer and legal processes can be quite different from those of traditional mortgages.”
Looking ahead, Egan believes the product’s flexibility will see it morph in line with consumer demand.
“I think the sector will go from strength to strength and keep increasing the number of consumers we help, year on year, because it’s such a flexible product that can help anyone, from first-time buyers to seasoned developers. There aren’t many other comparable products out there, so with more education and awareness we can start putting square pegs in square holes, so to speak,” says Egan.
We see more and more lenders moving towards refurb and hybrid development bridging products
A likely focal point for the market over the next few months is meeting the needs of entrepreneurs.
“I expect the bridging sector to continue to perform well, with commercial acquisition with the intention to convert to residential properties remaining strong,” says Satchell.
This view, he says, is based mainly on the government’s relaxation of permitted development rights, which has streamlined the planning process for many property entrepreneurs.
“The face of the high street will have changed hugely as we fully emerge from the pandemic, again offering bridging lenders and brokers the opportunity to provide finance for conversion to residential and semi-commercial,” adds Satchell.
A number of private equity firms have targeted the bridging market, resulting in a lot of new entrants
Experts hope the sector’s impressive growth over the past year will continue.
“As far as the next 12 months are concerned, we are cautiously optimistic about the outlook for the market,” says Wilson. “We don’t expect pricing to change and everyone seems fairly positive.”
Jannels adds: “Continued, sustained and sensible growth is something that we all want, and I think we will deliver it in the next year.
“There will be continued demand for bridging lending from investors and homeowners; and, as more brokers engage with the market, more customers will benefit from access to flexible short-term finance.”