As featured in Business Moneyfacts Bridging Finance Focus
As we approach the last quarter of 2014, it is now an opportune time to review what has taken place in the bridging sector during the last year and consider what 2015 will likely hold in store.
There have been a number of ‘key’ discussion points considered and debated extensively throughout the year – Regulation including MMR, the impact of the interim licence application; Pricing, has there been a real price ‘war’ amongst lenders; the ongoing Growth of the sector and finally; Education and Training.
Regulation as a topic has been widely discussed and debated during 2014, and it is without doubt that lenders and introducers should now be aware of the changes that have been imposed during 2014, and what is now expected of them.
Whilst regulation is important, this article does not intend to focus on adding yet further explanation and commentary to a subject that has already been extremely well discussed and documented throughout 2014! Both Advisors and lenders within this industry know what is expected, and by now should have fully embraced these changes.
So what lies ahead in terms of regulation? – There undoubtedly will be more regulatory changes to come. However, it would be inappropriate at this juncture to try and second guess what these may be.
The FCA and the ‘Euro’ servants in “dark suits and sunglasses’ in Brussels clearly intend to introduce further regulation into the financial sector, and there is really only one option…’Comply or Die’.
Pricing – The Cost War
Throughout 2014 there has been a great deal of noise from some bridging lenders promoting very low ‘as from’ interest rates, where ‘from’ is clearly the single most important word in their marketing campaign. Adopting this approach demonstrates nothing more than a distasteful attempt to ‘tease in’ deals through the promotion of extremely low rates, at which that lender is highly unlikely ever to lend at.
The question is whether introducers have been enticed by these rates, and have subsequently paid the price, resulting in their clients paying a higher price for a bridging loan than originally anticipated? – the answer to this question is probably, most likely, yes. As a direct consequence, this distorted promotional activity is now known to be on the radar of the Regulators.
On balance, most quality bridging and short term lenders are pricing deals at roughly the same level as their competitors, with the exception of one or two bank based lenders with access to retail funds, who are in a position to place bridging loans at a very low interest level for the ‘top rated, vanilla’ proposals. Whilst competitive pricing does play a significant part in selecting a bridging loan provider, the decision always also comes down ultimately to service and deliverability.
However, there is a but…there are some relative new lenders in this space who have little real experience to be able to successfully and effectively underwrite bridging loans with a real knowledge of risk assessment, and as such a new factor has entered the competitive framework – “High Risk, low grade loans which are in essence totally contrary to the Regulators demands for Treating Customers Fairly” !
There is evidence that some introducers are clearly following a “path of least resistance” in placing low quality, high risk bridging deals with naïve lenders, just to get a deal placed, when in reality the “best” option for that borrower was NOT to enter into a bridging loan commitment where the chances of repaying in line with the contractually agreed terms were remote at best!
Will this rate war continue into 2015? – Misleading financial promotions are high on the agenda for the regulators to now look at, and as a result, we may see rules imposed, dictating that pricing must be very product and criteria qualifying specific to be legal. There has been a suggestion that the Regulator will want evidence from lenders that where a low “as from” interest rate is promoted, their loan book will reflect that no less than 50% of lending has been carried out at that actual promotional rate.
As for “cavalier” lending. These lenders are likely to see their loan book begin to choke and as a result will begin to disappear. This has in essence already started in 2014 and there may be further noticeable withdrawals from the market in 2015, leaving behind the more established, professional and sensible lenders in the market.
There have been statistics issued by the various industry related trade bodies that highlight a significant level of growth within the bridging and short term property finance sector in 2014. Whilst these statistics are not wholly reliable, they do provide an effective overview of the position of the sector, and currently demonstrates that annual lending in the market sits somewhere between £2 billion and £3 billion. The question does however need to be asked – how much of this lending activity, falls within the category of ‘high risk lending’; that should not have been carried out in the first place?
Introducers and borrowers clearly have greater choice as to which bridging lender they choose to use, and this can only be considered positive for the sector. However, from the lenders perspective, there is still a cry out to Introducers to ensure that cases are properly presented, supported by full and accurate relevant information and disclosures. It is still a fact that in the majority of cases, enquiries are presented to Lenders with scant detail and the very barest of information rather than the requirement for the total polar opposite to that!
Lenders and introducers must be confident that borrowers have a supporting legal team that can deliver the highest level of commitment , urgency and property law knowledge to ensure a smooth and anxiety free legal process. Again, this remains a facet of lending which is sadly lacking! . We must therefore also seek improved performance from such professional partners as we enter into what is historically the busiest quarter of the year.
Will there be further growth in 2015? – Lending within the bridging and short term finance sector is directly and inextricably linked to transactional activity within the property sector and the availability of long term mortgage debt.
As we enter into quarter four of 2014, there are no apparent signs that the current trend in property investment activity will change and nor are there any visible indications that the existing liquidity of long term mortgage debt will alter. It is however, anticipated that the existing ‘common sense’ balance as to transactions and mortgage liquidity will continue into 2015 with no direct signs of mortgage liquidity either tightening up or indeed becoming more easy and readily available.
Education and Training
Throughout 2014, education and training in the bridging and short term finance sector have been high on the agenda for the NACFB, AOBP and ASTL. The recognition by the industry overall for a greater level of training has now been firmly established , and plans have been progressed to introduce new industry specific qualifications.
It is envisaged that 2015 will see the inception of a recognised examination system, developed by the AOBP, as a means of directly training and educating those involved in the bridging and short term finance sector.