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Surge in new lenders entering the bridging market

There’s been a surge of short-term lenders entering the market over the last 12 months, up by 50% on 2017, Brightone Law has found. 

Short-term lending transactions are also up 15% year-on-year.

Recent figures from the Association of Short-Term Lenders (ASTL) also show that bridging lending amongst its members rose by 15% in 2018.  The value of applications have also increased, up by 13.4% to nearly £21.5bn and total loan books increased by 3.6%.

Jonathan Newman, (pictured) senior partner at Brightstone Law, said: “Despite Brexit and slowing house prices, the industry has remained resilient.

“The current economic and property market conditions do not seem to have adversely affected transactional volumes, or the appetites of lenders to fund over the market as a whole.

“Whilst some lenders have applied greater caution in underwriting, others have seized the opportunity to gain a foothold.

“Short-term commercial lending is regarded as the last area of unregulated lending, and therefore relatively quick and easy to set up to lend and open to all.

“With the current climate amongst institutional lenders remaining cool and processes viewed as tiresome, labour intensive and unsatisfactory, significant volumes of finance are being redirected into the short-term lending space.”

Newman added: “We are also seeing a loosening of lending criteria and increased flexibility from new lenders entering the market. These new entrants are driven, passionate and have a willingness to adapt and innovate.  They will disrupt the market, just like the first wave of challengers did 10 years ago.

“However, what is deeply concerning is that some of these new lenders lack experience and so have the potential of being exposed to poorly non-performing customers, or unsuitable security.

“Many of these new players are unable to identify future problems and may not  have the personal  know-how, gained from experience, to deal with problem issues in an effective and sensible way.

“However, they can reduce some of those risks by tapping into the experience of professional partners for support.”

Newman said that selection of key professional partners is all-important to securing a successful start.

He said: “Cost is a factor in that selection process but should not be the sole one.Hence selection of key partners is vital.

“Valuers with longstanding experience of market volatility, but with particular experience of the chosen asset class; intermediaries that introduce, but who are active in the wider finance market, and who understand the borrower and maintain the relationship to contribute and participate in the exit too; solicitors who have the technical competence and process to transact the property side competently and securely, but with transactional  experience, knowing what can and sometimes does go wrong further down the timeline, and how to deal with that; solicitors that do not just identify issues but are capable of offering solutions.

“Brightstone Law has a well-established reputation for short term finance transactions and recovery I take great pride from the longevity of our lender client relationships.

“So many of our clients were once those disruptor new boys on the block and now, are established, key players, leading brands and the benchmark for new entrants. To have played a role in their growth and success is truly satisfying from our perspective.”

Source: Mortgage Introducer

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Bridging rates won’t rise after base rate increase

The Bank of England’s decision to raise the base rate from 0.5 to 0.75% is not expected to affect short-term lenders, Benson Hersch, chief executive of the ASTL, predicted.

The Monetary Policy Committee voted unanimously to increase the base rate.

Benson said: “Today’s announcement that interest rates are rising will as expected have a major impact on longer-term lenders, as they may feel compelled to raise rates.

“This will affect exit routes for short term loans, but unless there is an expectation of further increases in the medium term, I don’t expect rate rises to affect short term lenders.”

Alan Dring, consultant at Hope Capital, partially agreed, saying he didn’t expect an immediate reaction either.

He said: “The rate rise is not totally unexpected of course. It’s a reflection the Bank of England sees the economy being in a better state, which is encouraging.

“It will eventually filter through one way or another. There won’t be an immediate reaction. At the moment it’s just business as usual and the sector will adjust as it feels it needs to.

“Most of the funding is pretty stable at the moment. There’s no chance of a radical increase, just maybe a couple of the rates at the bottom end of the scale will be adjusted because they are maybe not as profitable.”

Jonathan Sealey, chief executive and founder of Hope Capital, also agreed and said that said that bridging lenders just need to be aware of any change in their cost of funds affecting their exit routes.

He said: “The 0.25% rise will have a minimal effect on specialist borrowers. Cost of funds will not have risen for most lenders, certainly not for private lenders, and so bridging and other specialist rates are likely to remain the same, affected more by competition than by any decision by the Bank of England.

“More institutionally funded lenders may notice a slight rise in their cost of funds but this is likely to take some time to trickle through to the borrower.

“The key thing that borrowers of short term loans will need to be aware of is that if may affect the affordability of their exit routes if their plan had been to move off their bridging rate onto a long term loan with a mainstream lender who now increases their rates.”

James Allen, head of alternative investment at Walker Crips, added: “For bridging lenders to be sensitive to the base rate, rates would need to be coming up to 5% or 5.5%, which is a long way away. I don’t think rates will rise to 5% for another 10 years.”

Jonathan Samuels, chief executive, Octane Capital, questioned the BoE’s decision.

He said: “While a quarter per cent increase won’t take home finances to breaking point, it will add to the pressure at a time when confidence is already low.

“The Bank of England’s hope is that this hike will be a shot across the bows to overly indebted consumers, and there is some logic in that. But the timing of this rate rise, coming in the shadow of outright politico-economic uncertainty, is less logical.

“Why rock the boat just as we approach the business end of Brexit, all the more so given that inflation is not significantly above target? Thankfully, many households have remortgaged onto fixed rates to protect themselves against rate rises in the medium term.”

Paresh Raja, chief executive of bridging lender Market Financial Solutions, warned how it will affect homeowners with a variable or tracker rate.

He said: “For those homeowners paying off variable or tracker mortgages, they will now be faced with an increase in their monthly payments, which could place considerable strain on households.

“What’s more, this rate rise will mean that banks will be more cautious when it comes to approving mortgage applications.

“The stringent lending measures that have been imposed since the onset of the financial crisis a decade ago have made it tough for people to access finance from high street lenders, and this latest rise could make it more difficult for people to successfully acquire a mortgage from a bank due to the increase in monthly payments they will now face.”

Source: Mortgage Introducer

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Bridging lenders have rushed into development finance

Legal expert Jonathan Newman reckons some short-term lenders have rashly entered into development finance without having the necessary experience.

Newman (pictured), who is senior partner at Brightstone Law, has seen a rise in lenders over-valuing the gross-development-value of properties, which can affect whether they come to market.

He said: “Short-term lenders went into development finance in a hurry probably circa four or five years ago.

“It is quite a specialist area of lending. Sometimes lenders will freely admit that they didn’t necessarily have the experience to get the right technical knowhow in-house.

“Lenders are now beginning to see problems arise which they weren’t expecting mainly as a result of a lack of experience.”

Another issue Newman highlighted is lenders failing to think through the impact developments can have on neighbouring properties, which can lead to complaints.

Lenders can also lose out if the developer fails to use the funds correctly, meaning they commonly have to scrutinise development cases on more of an ongoing basis than with standard bridging.

In all Brightstone Law has seen a 150% increase in ‘problem’ development lending cases in the last 12 months.

Ashley Ilsen, who left development finance lender Regentsmead in January to launch a new one called Magnet Capital this year, thinks Newman is bang on the money.

He said: “In the last 18 months we started losing business to lenders that were over-leveraging in term of loan-to-value.

“That was due to a spill-over from the bridging industry because it got crowded; it forced lenders to go into areas with nothing to do with bridging.

“It’s got a different skillset in terms of underwriting and valuing – hence a lot of them aren’t getting the money back that they thought they would get.

“If you are lending at 65% GDV and you are rolling up fees and that valuation wasn’t what you thought it would be, your loan-to-value is significantly higher.”

Both Newman and Ilsen added that lenders have gotten themselves into even more difficulties owing to the declining nature of the property market in the past few years.

Buster Tolfree, who is commercial director of United Trust Bank, which has separate bridging and development finance divisions, agreed that there is a significant divide between the two.

He said: “Just because you’re good at bridging doesn’t mean you’re good at development and viva versa.

“If you go into development with a bridging mindset it does raise certain risks.”

Association of Short Term Lenders data shows there was £386.1m worth of bridging development lending in the first quarter of 2018, a 22% increase from the previous quarter.

Safeguards

Newman advises lenders to make sure they use experienced solicitors, specialist valuers and knowledgeable quantity surveyors to manage risk.

He added: “I think development lending is double the risk of any other lending. Not only is it the usual loan and security risk, but the ending is likely to be over a much longer-term.

“The risks are two-fold. Who are you lending to and do they have a track record for developing in the character of the development that you are lending?”

Ilsen says the key is having the necessary expertise in-house and understanding the developer.

He added: “A good lender should not rely on partnerships. Any development lender worth their salt will have the expertise in house – you shouldn’t rely on surveyors to tell you what’s going on.

“You need to understand who you are lending to, whether SMEs or builders. You need to understand the delays to building supplies, the way prices fluctuate and their ability to market their product when it’s finished.”

Tolfree added that United Trust Bank manages risk by assigning a business development director who has a close relationship with surveyors and builders to look after the project from start to finish.

Source: Mortgage Introducer