No one knows when bridging finance first started, but it’s believed to have begun as a lending speciality in the late 1960s in London and Manchester.
At that time, most of what is now termed ‘bridging’ was done by banks and professionals such as solicitors and accountants. In the 1960s there were immense restrictions on bank and building society lending. They were unable to provide loans on people’s homes for any purpose other than its purchase. Much later restrictions were lifted to allow for home improvements.
The only bridging available was for people who were buying their homes and had exchanged contracts for the sale of their existing property, what today we would consider a “no-brainer”. This left an enormous gap in the market for short term lending.
Many bridging businesses started as small firms run by the owners. One of the first bridging firms was run from the home of a director. A high proportion of the initial entrepreneurs were ex-South Africans, prepared to roll up their sleeves and work hard in their adopted homeland.
Bridging remained largely under the radar until house prices crashed in 1987. The housing market only recovered in the late 1990s, so bridging loans, with set monthly costs, was seen as a positive option by property developers and investors.
The buy-to-let market didn’t get going until 1988 when the Housing Act created the Assured Shorthold Tenancy (AST), removing the risk of indefinite security of tenant tenure. This provided more opportunities for bridging.
Bad reputation
It is around this time that bridging lending got the rather negative reputation that it is still shrugging off to this day. The early 2000s became the heyday of self-certification; with long-term lenders queuing up to provide refinance as property prices climbed. Both long and short-term lenders made loans to people in a way that today would be considered unthinkable. 2003-2008 saw rapid growth in the sector, but a fair proportion of the business could be classed as sub-prime non-status loans.
M-day (1 November 2004), introduced strict regulation of loans to owner-occupiers so some firms abandoned the owner-occupied residential bridging market.
Just three years later, August 2007 saw the start of the credit crunch, when BNP Paribas stopped investors withdrawing their money and in September the first bank run in the UK for 150 years hit Northern Rock. September 2008 saw the fall of Lehman brothers, followed by the Icelandic bank crisis and the collapse of the house of cards that was securitisation of sub-prime loans.
The reaction by the mainstream mortgage market was effectively to shut up shop to all but the most risk-free customers. This created yet more opportunities for the bridging sector. Some bridging firms did not survive the turmoil, due to factors including withdrawal of bank funding, irresponsible lending and, in some cases, alleged fraud. Better-funded and better-skilled bridging firms prospered however, with sound business models and high standards.
Restored confidence
In April 2008; to help promote bridging finance, 19 bridging firms got together and formed the Association of Short Term Lenders (ASTL). This was a sign of confidence in the sector and its future. The sector has continued to grow and prosper, as has the ASTL. The ASTL has put in place a code of conduct and a Value Charter that all members need to adhere to. It now has 30 full members and 20 associate members.
Loans written by members for the year ending March 2015 totalled £2,354 million compared to £477m for the year ended September 2011. Loan books at the same dates have grown to £2,220m compared to £580m. Bridging is now used for a wide range of uses including by businesses who want to raise money against their property in order to take advantage of a business opportunity as well as by developers.
The restriction of lending by mainstream lenders over the last eight years has led to a proliferation of bridging lenders. While many are serious, well established businesses, it is hard to measure the size of the bridging market because there are also a number of professionals and firms who grant loans completely under the radar.
The ASTL continues to strive to raise standards in the market and has achieved greater recognition both for its members and for the industry as a whole, and is at the forefront of the promotion of responsible bridging lending.
