In this week’s head to head, two brokers explain their position on bridging: with one broker keen to do the business, while the other would only consider bridging as an absolute last resort.
Martin Stewart, director of independent mortgage broker, London Money explains why he has an appetite for bridging business:
We never used to be strong advocates of bridging finance but the onset of the credit crunch and the wholesale changes in mortgage underwriting that followed has led us to have a change of heart. Historically we felt it was more the domain of the property developer or the rare individual cases where a sale and purchase could not happen simultaneously. But we live in a different world now, one where nobody can take any form of raising finance for granted.
In this climate where else could a 78 year-old man raise £200k quickly to help facilitate his daughter buy a house before her landlord sold it over her head? Or a man with no visible source of income raise £50k to help fund the buying of a franchise in order to get himself back on track and improve the quality of his and his family’s life?
The most recent enquiry we had involved a client wanting to buy a property at auction. As is usual with auctioned properties the house was in a severe state of disrepair and the traditional mortgage offer we could secure for the client would no doubt come with a full retention. A short term bridging loan to help ensure completion could occur within 28 days and with enough cash to complete the refurbishment all makes for one very happy client. By virtue of having the already agreed mortgage offer in place it also gave the bridging loan company peace of mind that the client had an exit route.
And that last point is the most fundamental piece of the bridging jigsaw. You should only go ahead with a bridging loan if you are certain you have the means to repay by the set date as failure to do so could put you in serious financial difficulty.
Before heading down the bridging route with a client we will try and exhaust the traditional routes of raising money even as far as asking whether friends and family can help. The costs and fees associated with short term finance ensure that we treat it as a “lending of last resort” and fully explain all the implications of securing money in this way.
We feel the short term financing market will only grow in the years ahead both for bridging finance and secured loans. You only need to see the implosion of the pay day loan sector to realise we are witnessing a wholesale shift in the attitude of the consumer with regard to borrowing needs. We fully intend to support the bridging sector going forward in return for them continuing to support our clients’ ever changing circumstances.
However, on the opposing side, Rob Killeen, business manager at brokerage Capital Fortune insists he would only turn to bridging as a last resort
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Rob Killeen, business manager at brokerage Capital Fortune insists he would turn to bridging as a last resort:
We accept there is a clearly a need, albeit peripheral, for short term bridging finance, and brokers and lenders seeking to meet that need and understandably, perhaps, make a commercial margin have moved into this space.
Whilst we can offer this service, we have to date felt little need to arrange bridging particularly when there remains an array of mainstream lenders who can act extremely quickly, coupled with the availability of both development and commercial finance at competitive commercial rates.
We appreciate there may, at times, be exceptional circumstances to warrant bridging finance, but for us this would be the real exception rather than the rule. The concern for us is that bridging and other short term loans are often advertised as somewhat easier products for mortgage lenders to sell and for prospective customers to obtain. The products are generally unregulated for commercial projects and are less regulated for residential compared to other mortgage deals.
The impact of perceived mis-selling makes both clients, hence brokers vulnerable and even when appropriately sold, there has to be inescapable, inherent additional risks with any high cost short term finance.
It remains surprising that bridging on a roll-up interest basis can be provided without satisfying the requirement of affordability and even the Financial Services Authority in the Mortgage Market Review has indicated that they do not require a lender to demonstrate affordability. This to us is a missed opportunity for appropriate regulation.
The loan, whilst not having to be serviced, should still require a responsible lender to apply an affordability model and to consider eventualities in the event a short term loan cannot be paid. In light of changing personal and economic circumstances, what may be presented at the outset as a plausible and “credible repayment strategy in place to repay the loan” may simply not materialize.
The sheer cost of bridging at double digit interest rates, alongside significant set up and arrangement charges can be problematic. In a tightened climate of lending, the ability to remortgage these clients onto mainstream products can also prove more difficult increasing customer costs even further, if the bridge has to be extended.
In the climate of treating customers fairly brokers should only deem bridging an absolute last option and it can only ever be appropriate where the client is genuinely requiring enhanced speed or their remains absolute difficulty with finance in the wider product market.