I expect the bridging market to grow in 2018 but not by as much as in previous years as there is a definite shift away from short term loans and towards medium to longer-term loans of two to five years.
The reason is the way bridging lenders now get their funding. Bridging rates have actually become too cheap. As strange as that may seem, the competition for ever lower rates is driving lenders to obtain institutional funding, which is cheaper but much more restrictive. This is driving some lenders towards more of a tick box approach which means that we lose some of the responsiveness and flexibility that the bridging market was known for.
If a borrower has to go through all the procedures needed for a longer-term loan they may as well go down this route as the interest rates will still be cheaper than a bridging loan. People come for a bridging loan because it is quick and flexible; if it loses that then it loses its edge.
An additional challenge is how the borrower pays back the bridging loan. It is not a great market for property sales, while the buy-to-let market is ever more challenging, as a result many borrowers need a long-term mortgage at the end of their bridging loan rather than use a sale to pay it back. This means that the bridging lender needs to underwrite the borrower more than ever to ensure this is a realistic exit route.
Despite the more competitive environment, there is still a plethora of new lenders entering the market, all looking for distributors such as ours to carry their products. The challenge is that there are few lenders coming in with anything new. Everyone says that they have great service and quick turnaround times but it is hard to tell if this is the case until you use a lender, and not every distributor or packager wants to risk their reputation trying someone else if they don’t offer something really new.
While many new entrants offer higher LTVs, this is having the result of pushing them up across the rest of the market. Again, this is good news for borrowers but has longer term risks for the lender when the borrower comes to refinance the loan away.
This all means that we have a much more challenging outlook to the bridging market and it will be a much tougher market for new entrants in 2018 than it was previously. That said, it is a positive for borrowers that they can now get bridging funding so much cheaper and at higher LTVs, this may well attract more borrowers to consider a short-term loan where they may not have before.
The existing lenders who keep their responsiveness and flexibility as well as competitive rates will be the real winners this year.
Elliot Hyames, Head of Structured Finance at First 4 Bridging