Traditionally bridging finance is best defined as a short-term loan, often over a period of between two weeks and three years, prior to the arrangement of long-term finance. Most commonly referred to as a bridging loan in the UK, it is also called a caveat loan and swing loan in other countries. While the headline interest rate on bridging finance can seem fairly high, compared to traditional loans, this does not give a fair reflection of their value and popularity.
We will now take a look at various aspects of the bridging finance market including popularity, current rates, bespoke arrangements and the different structures available.
UK bridging finance fact check
A recent report into the UK bridging finance market by Ernst & Young has cast a very interesting light on this often ignored area of debt finance. Some of the basic facts include:-
• Average loan to value 45%
• Average term of bridging finance 11 months
• Average monthly interest rate 0.84%
• A first charge was in place on 83% of bridging loans
• A second charge was in place on 17% of bridging loans
While the following graph perfectly illustrates the fall in average monthly interest rates as a consequence of base rate reductions, it is also starting to reflect competition in the industry and pressure on margins. Many people will be surprised to see current interest rates charged by bridging finance companies compared to those of years gone by.
The most popular reasons for securing bridging finance are:-
• Property refurbishment 27%
• Mortgage delays 25%
• Re-bridging loan 13%
• Business purposes 11%
• Auction purchases 9%
• Other 15%
While it is fair to say that the majority of bridging finance relates in some shape or form to property transactions, both commercial and residential, there are other areas in which it is useful. While these industry figures make for interesting reading, the situation for high net worth individuals/investors can vary markedly.
As an independent mortgage broker we have access to an array of lenders in the UK, Europe and across the globe. Bespoke refinancing arrangements often go hand-in-hand with other financial transactions to create a specific structure for a specific situation. It will depend upon the scenario but when transacting with private banks and niche lenders there may be a small premium on general rates for non-traditional situations.
Growth of the bridging finance market post crisis
There is no doubt that the US sub-prime market crash, and resulting worldwide economic downturn, had a significant impact upon debt markets. As a consequence our experience confirms that high street banks decided to take a more risk averse approach to finance. This included what many perceive to be the riskier end of the market such as bridging loans, leaving a vacuum which needed filled. In reality, the vast majority of bridging loans are secured by a first charge on a property/asset and due to their relatively short term nature they are not as risky as many would have you believe. This vacuum of finance for short-term transactions has very quickly been filled by private banks and an array of niche lenders. As a consequence, there is more flexibility, more choice and more competition allowing us to negotiate the best deal for our customers on a case-by-case basis.
Emergence as a lending class in its own right
Many will be surprised to learn that between 2013 and June 2017, gross bridging lending in the UK increased at a compound annual growth rate of 26.1%. Indeed figures show that in September 2012 UK gross bridging lending totalled £900 million. There was a gradual increase with the market topping out at £4.4 billion before consolidating slightly after the Brexit vote. After a slight dip to around £4 billion in late 2016 the figure for June 2017 shows a recovery to £4.3 billion.
The following graph also shows an interesting pattern in lending with a greater emphasis on commercial and development projects. While the compound annual growth rate between 2018 and 2022 is expected to fall to around 11%, this is still impressive especially when you bear in mind the current market conditions. While these graphs (figures from two different sources) vary slightly they both show a significant growth in bridging finance which is likely to continue for some time to come. It is also worth bearing in mind that regulatory changes by the Prudential Financial Authority are unlikely to assist high street banks when carrying out customer affordability calculations – pushing more business towards private banks and niche lenders.
Secondary Source: E&Y Report
In many ways Brexit has again created a unique scenario where traditional banks are taking a back step while private banks and niche lenders step forward. The emergence of crowdfunding platforms has also added an interesting ingredient to the mix. While nobody is suggesting that high street banks will disappear from the bridging loan sector, there is no doubt that competition is growing especially for bespoke arrangements for high net worth individuals.
Bridge lender types
As we touched on above, there has been a definite change in the make-up of the UK bridging finance market since the 2008 economic crisis and subsequent Brexit vote. The fact that UK base rates remain relatively low at 0.75%, with ECB base rates at 0%, has created a stream of relatively cheap finance. This opportunity has been grasped with both hands by many looking to invest in property (residential and commercial) and also expand or refinance their business operations.
The research note by Ernst & Young confirms what many people already suspected; the UK bridging finance market is more institutionalised than ever before. We have seen the introduction of niche bridging lenders, challenger banks as well as family funded operations. Around 75% of market activity is currently carried out by 10 of the 40 or so main participants in the UK bridging finance market. Interestingly, we still continue to see a constant stream of new entrants to the market which suggests that transaction numbers are increasing again and demand is growing.
There is no doubt that the initial benefactors from a pullback by high street banks away from the “more risky” end of the bridging finance market were private banks. Funded in a very different manner to high street banks and able to be more flexible in their approach to affordability calculations, they have been the first port of call for many mortgage brokers over the years. Interestingly, many observers believe that the emergence of niche bridging finance operators (of which there have been many in recent times) may partly be a consequence of high street banks and (some) private banks slow approval of large mortgages.
In reality, private banks are more flexible, more accommodating and certainly much quicker at processing applications than their high street counterparts. In many ways bridging finance is a means to an end in building a long-term relationship with high net worth individuals. That said there is no doubt that specialist niche bridging finance providers (often focusing on one area of the market) continue to increase market share.
We have extremely strong relationships with an array of private banks in the UK, Europe and globally. Historically we find that processing times can be slashed by approaching the more relevant private banks for a specific client’s unique situation. We research the best structures, the best terms and therefore avoid delays where others may take a scattergun approach to applications.
Building societies and other mutual bodies have been extremely active in the mortgage market for many years now. The following graph shows the annual mortgage approval numbers going back to 2006 for building societies.
In recent times some building societies have ventured into the bridging loan market while others have released a new product in the shape of “two year mortgages”. These are effectively short-term finance agreements for those looking to acquire a new property but waiting to settle on the sale of an existing property. There is a maximum loan to value ratio in the region of 60% across the two properties or the short term mortgage can be secured against one property.
As these products are “interest only” and the exit strategy is “sale of property” the affordability calculations are less onerous due to the degree of security available. While it is fair to say that this type of arrangement is not necessarily suitable for all parties, it is an interesting option for building society members/customers.
There is no doubt that the need for focused bridging lenders has to all intents and purposes created a submarket within a market. Traditionally mortgage brokers would first look towards high street banks then private banks, depending upon the client’s financial situation. As highlighted above with the various graphs, there has been significant growth in bridge financing since 2013 and this is likely to continue. The more banks and building societies take a step back from traditional bridging finance the more the private banks and niche lenders will step forward.
Over the last few years we have seen competition grow within the niche bridging finance sector and this is likely to continue. Even though 75% of business is carried out by the 10 major bridging financing providers, the rest of the market is still extremely fragmented with potential for mergers/takeovers. There is also the opportunity for smaller bridging lenders to partner with mortgage brokers and other complimentary businesses. This would create a larger group, with a larger client base and a larger range of financial products. There is also the option for UK bridging finance companies to look towards Europe and globally. The European bridging finance market is nowhere near as developed as that in the UK and indeed many financial institutions, such as those in Spain, appear to have no interest in providing bridging finance at the moment.
Private families / individuals
Family office partnerships and similar operations are also heavily involved in the bridging finance market. These particular operations tend to look at finance options on a case-by-case basis taking in the risk/reward factors. The main attractions of family office partnerships are the fact they tend to be relatively nimble on their feet and flexible with significantly shorter application processing times.
Thankfully, many are also willing to look at the bigger picture, as opposed to simple loan to value ratios. On occasion this can lead to loan to value ratios of up to 75%. It will obviously depend upon the individual application but family office partnerships offer the opportunity to utilise multiple income streams as well as worldwide assets. This is something which many other bridging finance companies may be unwilling to recognise.
In a similar fashion to family office partnerships, we have seen the emergence of private equity businesses in the bridging finance sector. The fact that the majority of finance is covered by a first charge obviously offers a degree of security and then it is a matter of considering the margins available. There are many large private equity funds involved in the UK bridging finance market and they are certainly increasing competition in what is already a competitive sector. Again, in a similar fashion to family office partnerships, they tend to be flexible and if the numbers stack up and the security is available then there is every chance that an application will be approved.
Peer to peer
Peer-to-peer financing is often confused with a crowdfunding and while similar in some ways there are fundamental differences. They both amalgamate the funds of investors but peer-to-peer financing is a debt arrangement while traditional crowdfunding tends to revolve around an equity stake in a project. The more common form of crowdfunding investment is also focused on one particular project as opposed to peer-to-peer lending which is based upon the borrower and their ability to repay the loan.
Peer-to-peer platforms will consider the risk/reward ratio, loan to value of assets and the individual/company’s affordability factor. Rates and returns will be fixed at the start of the term for peer-to-peer investors unlike equity stakes via the crowdfunding route.
More and more we are seeing the creation of large pools of investment funds which can be spread across an array of different scenarios and types of finance. In many ways bridging finance is simply a risk/reward calculation as far as peer-to-peer investors are concerned. There is no emotion and no bias just a simple cold calculation.
How do bridging finance lenders make money?
While some bridge financing lenders will use this type of service as a means of selling additional products within their group, the underlying bridging finance business still has to be profitable. There are a number of factors to consider with regards to bridging finance costs and exactly where they make their money:-
• Traditional bridging finance costs were around 1.5% a month prior to UK base rates hitting historic lows. This equates to an annual interest charge of 18% which even in periods of high interest rates offers significant potential for profit.
• Average bridging finance monthly rates now stand at around 0.84% which equates to an interest charge of just over 10% per annum. In the current low interest rate environment this also offers potential for profit.
• Bridging loan arrangement fees will vary from party to party but often start at around 2% and fall on a sliding scale the greater the level of finance. It is also worth noting that the vast majority of bridging finance arrangements will have no early repayment penalties.
In reality it is all about volume and margin when looking at profitable bridging finance lenders. As we will cover in the next section, this is why many niche bridging finance lenders are looking to merge with competitors to create larger groups with relatively lower base costs. On the flipside of the coin, many private banks and niche lenders are prepared to work on relatively small profit margins as a means of introducing high net worth individuals to their wider group products/services. Unlike many high street banks, these finance providers tend to take the bigger picture into consideration and are often looking for long-term relationships.
Fragmented / niche markets
As we touched on earlier in the article, the recent Ernst & Young report into bridge financing in the UK suggested that the top 10 providers account for more than 75% of market activity. It is believed that around 30 additional bridge financing companies make up the rest of the market which is fragmented and ripe for consolidation. There are a number of options open to both major and niche market players such as:-
• Merging with competitors to create larger groups with relatively lower base costs
• Selling out to a competitor or somebody in the mortgage broking industry
• Expanding into overseas markets – the European bridging finance market is nowhere near as developed as the UK
• Long term relationships with mortgage brokers offer a constant flow of potential customers
• Expanding product range to take in other complimentary services which will improve profit margins
• Exit the market – there have been rumours of smaller niche bridging finance companies looking to exit the market because of excessive competition
As you’d expect with a market which has increased dramatically over the last 10 years, there is growing interest and growing competition within the UK bridging finance sector. As with any other business sector, the leading companies tend to account for the lion’s share of overall business. The recent Ernst & Young report suggested that the top 10 bridging finance companies in the UK account for 75% of business. It seems inevitable there will be further consolidation within the industry in the short to medium term with some companies exiting the market. We are also likely to see the emergence of new niche finance providers because while property bridging finance tends to take centre stage, there are other regular uses for this type of funding.
Here at Enness we are able to utilise our independent status to build long-term relationships with an array of bridging finance companies offering general finance and niche products. The greater the competition, the more chance of negotiating favourable terms for our customers especially those with non-traditional financial situations.
Regulated / unregulated
Even though regulation throughout the UK financial sector has tightened in recent times, there are types of regulated and unregulated business in the bridging finance sector such as:-
• Property bridging finance where the borrower/family occupy at least 40% of the property
• Funding covered by a first legal charge against the property which is/will be occupied by close family
• Business regulated by the Financial Conduct Authority
• Regulated residential bridging loans
• Second legal charge on the borrower’s home for more than £25,000 and relating to business purposes
• First charge on a commercial property
• First charge on an investment property
• Funding for the purchase/development of land
• Semi-commercial property such as living quarters above a retail outlet
There are different protections for investors undertaking regulated/unregulated business which they will be made aware of by the bridging finance providers.
Need for advice from the whole market rather than being sold a product
Here at Enness we value our independent status which allows us to talk to and transact with all bridging finance providers. Where some of our mortgage broking competitors are tied to specific products and specific groups, we have no such restrictions. Over the years this has allowed us to build very strong ongoing relationships with an array of leading and niche bridging finance lenders. The fact that we can very quickly identify the best lenders for a customer’s particular scenario saves time, money and effort.
We also have significant experience in structuring deals to compliment a customer’s income, assets and plans for the future. This is where private banks and niche bridging finance lenders come into their own, offering significantly greater flexibility than their high street counterparts. That is not to say that some high street financial institutions are not competitive with vanilla type bridging finance but many of our customers have worldwide assets and worldwide income streams. Not all high street financial institutions appreciate this.
Protection from miss-selling (desperate/vulnerable customers)
Over the years there have been a number of reports into the bridging finance sector with obvious emphasis on the regulated area. During this time four general areas of concern have been highlighted which could in certain circumstances lead to the mis-selling of bridging finance. These include:-
• While not so much a problem at the moment, the exit of many high street banks from the bridging finance sector did for a period result in reduced competition. In theory this allowed some bridging loan companies to increase their interest rates on short-term products. In reality market forces will tend to equal out uncompetitive rates of interest.
• Some bridging finance companies have taken advantage of often desperate consumers who may have limited opportunities to raise much-needed finance. If for some reason they were misled or not informed about the details of the funding available, there will obviously be potential recourse for compensation.
• While here at Enness we do not subscribe to this strategy, some mortgage brokers are happy to arrange bridging finance where there may be other possibilities more appropriate for the customer. We prefer to know our customers, discuss their overall financial stability and then advise accordingly about the most appropriate forms of finance. Basically, if it doesn’t work for the customer then it doesn’t work for us.
• There are some bridging finance companies that pay relatively high rates of commission compared to others. Again, while the market is competitive and business is business, the requirements of the customer must come before any remuneration considerations.
We know that the previous regulator, the Financial Services Authority, flagged potential issues with bridging finance as far back as 2011. There were concerns that some brokers were being “imaginative” when recommending bridging finance to their customers. There was even evidence of unregulated lenders operating in the residential market which is actually regulated by the authorities. Thankfully, instances of potential mis-selling are few and far between and customer, compliance and regulatory pressures are focusing the minds of brokers.
If we take a step back and look at the situation from a distance, many bridging finance lenders now prefer to build long-term relationships with their high net worth clients. If the foundations of this potential relationship are flawed because of inappropriate advice this does not bode well for the future. So, while it is fair to suggest that some brokers may have recommended bridging finance where other options may have been available, we have seen a significant tightening of regulations and compliance protection. This is an ongoing battle but one it has to be said that the regulators are currently winning.
How we work, our access, range and experience
As we have mentioned on numerous occasions in this article, Enness is an independent mortgage broker with no formal ties to specific parties. This independent status allows us to work with the whole bridging finance sector in order to find the best deal for our customers. There are obviously a number of issues to take into consideration such as:-
• Exit routes
• Worldwide assets
• Worldwide income streams
• Potential for the future
• Alternative financial instruments
When looking at a particular project in isolation the use of bridging finance may be fully justified even if mortgage brokers today have an obligation to look at the wider picture. Sometimes the wider picture may allow the repositioning of certain assets and the use of certain income streams to reduce financial liabilities and payments going forward. Let’s not forget, the use of bridging finance is best described as short-term funding between the investment and long-term finance stages.
For many of our high net worth clients, bridging finance is often just a part of their overall financial requirements. As we get to know our customers, their background, plans for the future and financial strength going forward, we can take all of this into account and advise changes where appropriate. Historically monthly bridging loan rates have been around the 1.5% level although currently, with base rates at rock bottom levels, the average rate is nearer 0.84%.
Call us today for a no obligation chat
If you are unsure whether bridging finance best suits your current situation/plans for the future, or perhaps you are looking for an improvement on rates, feel free to call us for a no obligation chat. We will take a look at your wider finances in more detail, your plans for the future and your immediate requirements. We can then put together a specific structure which may include additional finance instruments to compliment bridging finance.
Short-term financing is more expensive than long-term funding and some niche market participants may charge a small premium for often complicated bespoke arrangements. It will obviously depend on the situation and the assets in question but for many people short-term bridging finance is the perfect means by which to fill short-term funding shortfalls.