But since the bottom fell out of the market during the credit crunch, the sector has been finding new ways to cope with tighter credit conditions, which is why bridging is being used to plug the credit gaps mainstream lenders won’t or have never been willing to fill.
Bridging has never been the cheapest option, but when deals complete in less than two weeks that price becomes worth paying for some. Bridging is an obvious fit for landlords keen to buy at auction, refurbish and rent or sell, because with just two weeks to complete, applying to a slower mainstream lender could end a property deal and lose a 10% deposit.
Several of the Irish and UK high street banks remain desperate to shrink balance sheets and have been targeting landlords en masse. Bridging lenders have been riding to the rescue when these landlords suddenly realise the bank isn’t joking and they have just 60 days to refinance, says David Whittaker, managing director of broker Mortgages for Business.
“Some landlords go about refinancing in an orderly manner and others not so much. Some actually think the banks are bluffing and are shocked into action when they get a letter threatening to appoint an LPA (Law of Property Act) receiver within 60 days,” he adds.
The six-month rule, as outlined in the CML Lender’s handbook, is another bridging business driver. The handbook suggests conveyancers must flag properties to lenders as an anti-fraud safeguard if they have been owned for less than six months. However, some mainstream and short-term lenders are happy to lend within six months if they are satisfied by the value of the asset.
CEO of short-term lender Dragonfly Jonathan Samuels said high street lenders, need rules to cut the probability they are lending in error.
“However, in the bridging world, we manually process and can take a view. We can see what has brought the investor to this point and we can see evidence of how that happened and decide if we are comfortable. It’s too difficult for a lot of the high street lenders to do that,” he says.
United Trust Bank’s head of bridging, Alan Margolis, says: “Bridging finance helps many investors sell and/or refinance their property portfolios. These investors have often been forced into a situation not of their choosing, but bridging finance takes the pressure off and allows the investor to sell or refinance at their pace, helping to avoid fire sales or being forced to take up unfavourable funding options.”
Traditional uses of bridging also include providing a stop gap between buying a property and release of funds after a sale. Capital raising for personal or business reasons are also popular as long as there are viable exits.
“But, without understanding what the proposed exit route is for any bridging loan, you are creating tomorrow’s problem,” says Margolis.
But when liquidity comes back, will mortgage lenders start specialist lending in sufficient amounts to close out the need for buy-to-let bridges?
Samuels says: “We’re seeing pockets of liquidity from high street lenders, but no consistency. We’ve always been reactive as lenders and the names of the lenders whose £200m of loans we’ve redeemed have been the same for four years now. I don’t think the lending outlook is going to change much for them or us.”