Recovery of mortgage industry ‘spells trouble for bridging’

Defaqto highlighted in its report that the recent strong growth in the bridging sector has largely come as a result of the financial crises in the mainstream lending market and its recovery could be cause for concern.

In addition, the potential regulation of the bridging sector under the European Union Directive could place heavy costs on lenders.

David Black, insight analyst, banking, at Defaqto, said: "When the mortgage market recovers, there is some cause for concern among bridging participants. This is because they will face an increase in the number of mainstream lenders offering more flexibility in their underwriting criteria and such would provide significant competition for the highest quality business currently serviced by bridging loans."

He added: "Bridging loans are unregulated but provide a useful and speedy facility that enables the right transactions to happen. If bridging finance does become regulated, the additional costs involved in compliance may reduce the returns available and potentially make the sector less attractive as an investment for private finance.

"Advisers need to keep abreast of such regulatory developments and their likely impact."

Nevertheless, Black said advisers should still consider using bridging loans to help customers with good credit histories that have been shut out by mainstream lenders, given that market conditions are still tough.

Black added: "There are an increasing number of lenders seeking to invest in the bridging market and this could work in favour of the borrower. It means that creditworthy borrowers with the right propositions may be able to benefit from the increased lender competition by seeing potentially keener interest rates."