You could say that bridging lending has been something of a late bloomer.
Initially a small industry that saw short-term loans offered to customers and businesses by wealthy individuals looking for a different type of investment opportunity, bridging has grown to be a multi-million pound business.
Companies in the sector now have brands and reputations able to match any mainstream lender and are gaining increasing traction in a market where firms and individuals are struggling to find credit from traditional sources.
Going back to the very beginning, Mark Posniak, head of marketing and operations at bridger Dragonfly, describes bridging in its early days as a ‘cottage industry’.
“At that time bridges were simply a type of loan offered by high net worth individuals who had a pot of cash and were looking to make a decent return.
“Often, these individuals had to wait for their loan to redeem before they could make another and so understandably the market started slowly. It was a cottage industry.”
Revolution came in the early 90s as bridging loans hit the mainstream, with traditional lenders unable to meet changing customer demand, a number of bridging firms took the market by storm.
“Property became a seriously attractive way to invest,” adds Posniak. “Bridging started to grow and the relationship between high street lenders and bridging loan companies was formalised.
“But as more and more people started to invest in property, the shortcomings of high street lenders were increasingly highlighted and an entire bridging industry grew as a result.”
But it wasn’t all plain sailing, to this day the industry remains scarred by problems during the housing market slump of the early 90s, when a number of customers took out a bridging loan to help them purchase a new property before selling their old home.
However, the collapse of the market then meant they then could not achieve the price they expected on their existing home, with many left servicing two major loans or forced to take a hefty loss on their old property.
High levels of interest, needed to reflect the risk associated with such a large, short-term loan, only compounded the problem and saw several major lenders pull out of the market altogether. Then, as house prices recovered from the middle of the decade onwards, bridging lending was forced to take a back seat.
It wasn’t until the credit crunch of the late 2000s that bridging truly announced its re-arrival. Danny Waters, chief executive at Enterprise Finance, said that the financial crisis saw the launch of a number of new lenders.
“The new players shook things up,” admits Waters. “They came in and set a new benchmark. They didn’t have the legacy issues that some older lenders had and they had most access to capital.
“It had all changed because private banks stopped supporting a certain type of lender. Elsewhere, the high street banks had to sort out legacy issues and create capital buffers and were also forced to shy away from new lending. Something which is still the case today.”
Posniak agrees that as most major lenders were hit hard, and that the rapid expansion of the bridging market was simply a response to that.
“The sector has grown exponentially on the back of mainstream lenders failing to lend,” he adds.
“Their excessive caution gave bridging lenders an opportunity and they were quick to take it.”
While bridging’s growth shows no signs of slowing down, the Financial Services Authority has expressed concerns about how some firms present interest rate payments to clients, with the market now splitting into several categories based on how transparently firms conduct business.
But Posniak says that the FSA’s increasing monitoring of the sector will prove to be a positive thing for bridging in the long term.
“Bridging has matured beyond recognition over the past 15 years. The difference between bridging pre-2008 and post-2008 is particularly marked.
“The fact that the FSA is taking a growing interest in our sector bodes well for the future of bridging. The regulator’s interest shows that bridging has arrived.
“As a result, the sector has evolved from a micro-niche into a much more mainstream area of finance that both consumers and businesses place increasing value on.”
Waters is bullish about the future prospects for bridging, predicting more growth in the sector as conditions in the wider market improve.
“I think bridging is here to stay and as banks’ lending increases the number of property transfers will increase and the opportunities for bridging open up.
“There’s more regulation than ever and the landscape has changed so much that the market is unrecognisable from a decade ago. The way we work from a transparency and professionalism point of view has vastly improved in that time.”
