Bridging Finance

As new and existing lenders and professional service providers to the short-term industry continue to diversify their product range to offer bridging products, a number of concerns have been raised amongst the broker community about their competence in such a niche, complex area of finance.

Some lenders and other parties involved in completing a deal remain largely unfamiliar with the way the industry operates, attracted primarily by the potential to make a ‘quick buck’. In such instances, what some claim to offer on paper may not be reflective of the service they really can provide.

Not only this, but increasing mainstream press coverage about bridging has also begun to attract applicants who may be unsuitable for this type of finance, creating a significant time-consuming stumbling block.

There have been many occasions where lenders have voiced their dissatisfaction with how and when brokers submit information, suggesting a lack of sufficient communication or professionalism on the broker’s behalf. However, our initial investigations found that lenders often present their requests for information in an inconsistent or unclear format or third parties involved can be a significant obstruction. It is with this in mind that B&C spoke to the broker community to provide a forum to voice their concerns…

Ken D’Cruz, Owner of The Money Man brokerage, told us that, “some lenders are much more transparent in their disclosure of fees in the indicative terms and some documents may not be as easy to understand for a client, which can often slow down the process.”

Information requirements can also differ, as Steven McColl, Partner at Soho Corporate, explained: “Most of our funders are ‘all-status’, so documents like bank statements are not required. These kinds of funders will lend against the strength of the underlying property asset.”

James Harries, Sales Director at Manor Mortgages, told us that lenders tend to differ in the approach they take to self-employed clients. He said: “How lenders assess income and affordability varies enormously. Some insist on accounts, others still refuse to accept SA302s. The market is evolving and clients need broker support more than ever.”

Further highlighting that the processes are rarely consistent, Keith Forster, Managing Director of Property Finance and Development, added:  “Some I feel ‘shoot from the hip’ whilst others are very astute, and these are my preferred lenders.”

Success rates

Steven McColl told us that, “Bridging is a ‘cast the net wide’ industry – you have to quote a lot of deals to land the fish. Once a deal progresses from DIP to valuation, the odds swing in your favour. You probably have a 60/40 hit rate at that stage in favour of the deal completing.  I would say that you have to issue ten DIPs for every completion.”

Offering similar estimates, Keith Forster said that from enquiry to completion success rates are quite low but from a lender’s application to completion, probably one in three. The problem at the enquiry stage is likely to lie within the client’s unsuitability for bridging finance, with very few lenders willing to lend in the specific circumstances.

However, Richard Martin, Business Finance and Mortgage Specialist at F1 Finance, drew our attention to another reason a deal may fall flat. He told us that, on rare occasions, lenders may pull out of a deal even after pursuing the application, which “often depends on how much funding they actually have available.”

Overcoming difficulties

There appears to be an overwhelming consensus amongst the broker community that legal firms or overestimated valuations provide the most common stumbling block in a bridging deal, but why?

Ken D’Cruz offered his thoughts: “The main weakness is that they see it as a dangerous product, but this is due to a lack of knowledge. We have been involved with cases where the solicitor has advised their client that a bridging loan is not the best option for them because it is expensive, regardless of if their client is pursuing the loan.

“From a broker’s and lender’s point of view, good money can be earned from a deal but solicitors will often earn the same for this finance as for mainstream mortgages so are less motivated to move quickly.”

Yet Arron Bardoe, Director at Temple Capital Finance Ltd, said that not only do the clients fail to respond quickly but the lender’s solicitor may not always ask the standard questions at the outset.

Andrew Hosford, broker at Voltaire Financial, suggests another potential hurdle brokers are often faced with: “The valuation not stacking up and slight variations of the truth from the client are the main stumbling blocks. The borrower perceives their credit history to be a concern – they are often reluctant to admit that they have a chequered past, which can kill the deal but if they were upfront about any issues we may be able to work around them.”

He continued: “There is sometimes a sizeable gap between what the client believes the property to be worth, which is how we will initially structure the deal, and the valuation for the lender. So the LTV will change, which could alter dramatically or even kill the deal.”

Many brokers will only deal with a select few lenders as they are familiar with their requirements and processes. Existing relationships present a lucrative stream of business in bridging, the brokers we spoke to explained.

Steve McColl agreed that established relationships means as a broker they are able to manage a clients’ expectations in terms of turn-around time, yet he stressed: “Some funders are slower than others, but sometimes the ‘slower lender’ is the better option for the client in terms of the overall package; I find as long as you are upfront with the client about the process and the timings involved they will be happy and work through the requirements with you.”

Similarly, Andrew Hosford said: “The relationships that we have can play a part. You get an understanding for how specific lenders operate and the way that they like deals and information presented of course, but ultimately it comes down to the quality of the deal.”

Richard Martin and Ken D’Cruz both told us that they don’t limit themselves to particular lenders and will compare the responses to offer their client the best rate, which will demonstrate to the client that they have researched the options available thoroughly.

What brokers want

Leaving us with their lasting thoughts, the brokers we spoke seemed to agree that commissions were not the driving force behind a deal. Steve McColl said: “Fee-wise, it is usually much of a muchness because if a fee is obtained via a proc fee or broker, the same ballpark figure is usually achieved. In my mind, it is more about finding the right funding partner for a client rather than commissions.”

Similarly, Ken D’Cruz offered his thoughts on the crux of the issue: “It is not turnaround time or service but about getting the deal done, which is about communication throughout the deal. Our interest is ensuring the client is properly informed to ensure the deal completes – we only earn our fee upon completion so the driving force for us has to be the commitment the lender has to the deal.”

And so, it would appear that consistency is what is needed from lenders. Fees are, to an extent, irrelevant and instead being able to deliver lenders delivering on promises is what is of vital importance to maintain their relationships with their clients. Very few brokers expect to receive ‘headline’ rates, which are there primarily to attract business. Instead, the ability to pay out on the deal is at the forefront of broker concern.

Tuesday 6th December 2011

Despite the significantly valuable benefits of bridging, this particular areGa of short term finance every now and then attracts negative attention from those who fail to articulate the numerous advantages of this unique financial product.

In response to an article recently published by The Times, in which the bridging industry has been described as arriving at ‘troubled waters’, Bridging & Commercial have reached out to the bridging community to allay unbalanced information about this hugely useful source of funding.

We spoke to Mark Posniak, Head of Marketing and Operations at Dragonfly Property Finance, who voiced his concerns about this kind of press. He said: “I’m disappointed that the article latches onto one aspect of bridging, rather than explaining the diversity of its uses.”

In essence, the article presents a disproportionate focus on struggling consumers who have turned to bridging for remortgage purposes. It explains how careless lenders are, exploiting those in financial difficulty by proposing a bridging loan to provide them with fast liquidity. Whilst there are some lenders who do practice irresponsibly this is very much a minority, with the majority of the industry operating fair practices.

Mark believes that it is important that attention is called to these rogue lenders. He said: “I encourage the publicity of those lenders who issue bridging loans irresponsibly – they should be held accountable.” Yet, he also expressed his concerns about such high profile press that “…represents a blanket opinion which fails to acknowledge the positives of bridging.”

Mark added that bridging is an enabler for many people in the current climate. He said: “The use of this type of finance is on the rise because obtaining loans from mainstream providers is becoming increasingly difficult. Injecting liquidity in the market to maintain growth and maximise commercial opportunity is key.”

The article advises consumers to be particularly wary of bridging finance because if repayments are not met, the borrower may be at risk of repossession. But this is the case for any mortgage issued by any lender, high street or otherwise, which is secured against their primary residence. And crucially, lenders only have the power to do so if they are regulated by the Financial Services Association (FSA).

The FSA imposes strict rules determining how, when and to whom bridging loans, secured against the borrower’s home are written, and as the article highlights, levy hefty fines on those who fail to comply by these regulations. The FSA state their rules: “Ensure compliance with regulatory requirements and standards, and ensure fair treatment of customers in arrears.”

Cheval Bridging Finance, a high profile regulated lender, who are thus able to issue loans with first charges on residential property also gave us their perspective. Gavin Diamond, Finance Director at Cheval, explained that responsible bridging lenders “…will only ever lend if the rationale for the loan is sound and deal makes sense both from the perspective of the borrower and lender – this applies to all bridging loan applications, not only regulated applications.”

He further disagrees with Sheila Nicholl, Director of Conduct Policy at the FSA, that regulated bridging loans should be limited to ‘chain breaks’. He added: “There are a huge number of different scenarios where a bridging loan secured against someone’s home makes sense and is appropriate for the circumstances. If the bridging loan is merely serving to delay the inevitable, lenders have a responsibility to decline the application as it’s not in the best interest of the borrower. Although some of the FSA-regulated loans that we do are “chain break” deals, they only represent a small percentage of the overall number of regulated deals that we do.”

We also spoke to Richard Deacon, Sales and Marketing Director at Masthaven Bridging Finance, who made it clear that sound advice is key to the successful implementation of a bridging loan. He said: “Let’s not forget that bridging finance is, and has always been, a niche product. It is up to us as lenders to inform and educate both brokers and clients alike to the usefulness of bridging finance.”

Echoing these sentiments of quality advice, Andrew Hosford, specialist bridging broker at Voltaire Property Finance offers an intermediary’s perspective. He said: “I think the help and education that we receive as brokers is good. It is always beneficial for lenders to put in the face time with the brokers and keep us up to speed with what is changing in the market place and what they are keen to lend on and vice-versa.”

Andrew explains that lenders are extremely diligent with who they take deals from as this will ultimately save money down the line. He added: “It is important that the lenders only deal with brokers that they trust and if they have any suspicions they should pull the plug on the deal. We have to be extremely diligent with whom we take deals from and who we look to place deals with.”

He continued: “We have an excellent network of established introducers, varying in profession; likewise we deal with reputable lenders. As the majority of our business comes from introductions we cannot afford to let our standards slip, we rely on our reputation and the reputation of the people that we deal with.”

Mark Posniak stressed that bridging should never be used in place of long term finance which is often a common misconception. He said: “It is an enabler for a transaction that needs a short term shot in the arm to get over the line. Clients are choosing bridging finance for its speed rather than desperation.”

Mark also observed that the bridging market is filling a void left by mainstream lenders, as they are often able to offer larger loan sizes than the high street which currently has a lack of funds available.

He highlighted the bright future for bridging and said: “There is a growing amount of innovation in the bridging market with lenders like us now offering medium term products for commercial buy to let opportunities.”

After speaking to numerous bridging lenders and brokers, it is clear that this article offers a largely unbalanced perspective of bridging, failing to take into account the diverse uses of this form of finance. Whilst raising the profile of bridging can only be beneficial to the industry, articles such as this make it clear that a complete picture is needed to offer a fair representation of bridging. 

Alan Margolis, Head of Bridging at United Trust Bank, informed us of the flexibility and appeal that bridging has for business nowadays.

It is perhaps a testament to the flexibility of the bridging product that its use has grown so noticeably over recent years. From the origins of the traditional loan to ‘bridge’ a funding gap we now offer loans for an ever-increasing spectrum of reasons. Whether it is for those downsizing who have yet to sell their existing property, protection against chain-breaking or enabling the purchase of a property at auction, bridging loans are increasingly being seen as something of a panacea for specialist funding. Speed has also been a factor in the growth of the product combined with a flexibility to address requirements such as capital raising and for a variety of niche uses such as funding lease extension premiums.

At United Trust Bank we are used to customers approaching us for bridging finance for a variety of uses and interestingly over recent months we have seen an increase in enquiries from business owners who are now looking at bridging loans to address a variety of circumstances relating to the business.

Examples of the types of the applications that we have received over recent months range from loans to support cash flow, loans to invest in the business and in one case to raise funds to buy out a business partner. So, why have businesses started considering bridging as a product? Perhaps one element is a restriction of the availability of funds from more traditional lenders. In past years business owners might have approached their high street bank for a business loan in the first instance, but in the current climate there is certainly restricted credit availability on the high street.

My belief is that it is the specialism of the lender as much as the product that has encouraged applications from new quarters. Bridging lending is bespoke lending and providers combine personal service with experience and an ability to structure more complex loans. This represents a seismic shift away from tick box lending which often resulted in a ‘computer says no’ response.

It could be argued that with loan applications considered on its own individual merits, with the decision being made by an individual with a genuine understanding of the case rather than the criteria, for all their innovation are actually signalling a return to ‘old fashioned’ lending. Many business owners will remember the days of branch based lending where the branch manager would know and understand you and your business. They would be aware of the local environment and the attitude, ambitions and plans of loan applicants. Perhaps, ironically, it is for the most old-fashioned of reasons that the most modern of products is gaining prominence for today’s businesspeople.

In a similar vein, and in keeping with responsible lending, is the paramount importance of the ‘exit route’. For each and every loan, prudent and responsible lending means understanding how the loan will be repaid. This protects both the lender and also ensures a duty of care is extended to the borrower. United Trust Bank actively encourages mortgage introducers to explore with us the opportunities that bridging loans have to offer their clients and their businesses.