Dark clouds ahead for bridging finance market

There is trouble ahead for the bridging finance sector, broker Finbri has warned.

Commentary from the bridging loan specialist said that rising interest rates pose a challenge for the sector, given that this type of finance typically has a higher risk profile than other forms of lending.

“Whenever there’s a rate increase, it reduces the net loan the borrower can raise and jeopardises the borrower’s exit, especially when the exit strategy is to refinance,” Finbri said.

Read more: LendInvest limits bridging LTVs and cites importance of exit strategies

Other challenges include the decline in property valuations and government intervention to support borrowers.

Following a meeting between Chancellor Jeremy Hunt and mortgage lenders, an agreement has been reached whereby lenders grant a 12-month grace period to struggling borrowers before repossession.

“The repossession agreement…is further bad news for bridging lenders as it ties up their capital in potentially long-term bad loans,” Finbri said. “Not ideal when their business model is short-term lending.

Read more: Property investors drive bridging loan activity

“However you view it, lenders will have a harder time in the market for the foreseeable. The combination of higher rates, lower loan to values, and increased defaults means lenders’ ability and appetite to lend could decrease.”

Finbri also commissioned a survey which found that 64 per cent of bridging loans are sourced from brokers, with the remaining 36 per cent are originated from the lender directly.

The most commonly cited reasons for using a broker were the advice and guidance provided, the ability to get the best terms and rates, speed and efficiency, and the broker’s understanding of their needs.

Those who opted for a direct lender said they did so due to recommendations, to speed up the application process, direct communication and avoiding broker fees.

“With a number of new lenders entering the market, whilst others are exiting, plus product changes and lending criteria in constant flux, a good broker can make all the difference to securing the borrower finance –especially where speed is critical and the deal is anything other than vanilla,” said Finbri. “The better brokers will be in hot demand in the coming 12 months as borrowers find securing their bridging finance more challenging.”

Due to macroeconomic conditions, peer-to-peer lending platforms are anticipating increased interest in bridging loans, as developers need more funds to finish projects in a high-inflation environment.