Following an article entitled ‘High-cost bridging loans that tempt trapped movers’, which featured in the internet’s most widely-read UK news site, the Mail Online, the bridging world felt it necessary to offer a more concise view of the industry.
In the Mail’s article, it was suggested that bridging loans were expensive, risky due to a lack of regulation, and also problematic for those with financial difficulties.
However, the tabloid failed to point out the fact that this niche financing option was never intended to be regarded as a long-term solution for the residential market.
Mark Posniak, Head of Marketing and Operations at Dragonfly Property Finance, said: “Bridging loans are in no way designed to be used by investors as a replacement for mainstream mortgages, and those thinking to do so should look elsewhere.
“Property professionals may turn to this type of finance as a means to secure short-term finance on some deals, but they would be doing so because they need funding quickly, and not because they cannot obtain long-term finance elsewhere.”
Christian Faes, Managing Director of Montello, added: “The reality is that most bridging finance borrowers are not getting bridging finance to deal with a ‘financial problem’, but more likely are using it as a way to capitalise on an opportunity – such as the opportunity to buy a property at a discounted price off a receiver, or to complete a purchase at auction.”
The Mail also chose to inform their consumer-based audience that “The Association of Bridging Professionals (AOBP) estimates that just 10 to 15 per cent of business is regulated by the FSA”.
Graham Allen, Managing Director of Commercial Money Matters, commented: “This statement is a red herring. It is true that not all lenders are regulated, but this is due to the fact that they are completing loans on commercial and non-residential property.
“All lenders who deal directly with the public and provide loans on the borrower’s primary residence are regulated by the FSA. According to this regulation, they are required to fully inform any potential borrower as to their terms and conditions through a KFI (Key Features Illustration).”
Terry Markham, Director of The Funding Operation, explained that if the prospective loan applicant was accessing a bridging lender via a broker, then a quality broker would ensure that the pros and cons of the deal, as well as the full costs, were understood by the borrower.
Terry Pritchard, of PWF Finance, added:”Over the past 3 years specialist lending has become more innovative and the lenders and funders in this market have become ever more creative to fulfill individual clients needs, this does not however mean that the broker/adviser forgets their responsibility to the client and my personal experience of advisers in this field and the lenders is that they are all very diligent in their approach to the product suitability for the client, this is demonstrated in the low number of default issues in the sector.”
Another section of the Mail’s article, which several bridging lenders took exception to, was that which portrayed the overly expensive nature of the funding.
Alan Margolis, Head of Bridging at United Trust Bank, said: “Bridging loan costs reflect the fact that lenders are only able to earn interest over a very short period compared to a traditional mortgage and that borrowers are receiving a very bespoke loan tailored to their specific needs.
“A tremendous amount of work is involved in properly underwriting a bridging loan and if required they can be processed and drawn down in very short timescales, beyond the capacity of mainstream lenders.”
The AOBP, the Association of Short Term Lenders (astl), lenders and bridging specialists alike were keen to state that whilst bridging finance is a niche product, it has and will continue to provide a vital source of funding to many borrowers.
James Bloom, Chief Executive of Regentsmead, said: “In the right situation, bridging finance is a vital tool that allows situations to proceed that otherwise would not. A sweeping statement saying that bridging is dangerous would be like saying mortgages are dangerous; for the right situation, bridging finance can be extremely helpful.”
Duncan Kreeger, Chairman of West One Loans, added: “West One Loans, a member of both the astl and the AOBP, specialises in providing vital short-term funding for small businesses and individual property investors who are starved of the cash liquidity they desperately need to grow their portfolios or expand their businesses.
“This pipeline can literally be a life-changing resource for many people in the economic climate.”
The AOBP explained that the most important message to project to potential borrowers was the fact that, since bridging is a specialised product, transparency, at all stages, is paramount.
A spokesperson from the AOBP said: “What is imperative is any customer entering into any financial agreement; especially where rates and terms differ greatly from the traditional high street deals, they enter into the transaction with their eyes wide open.
“The AOBP (the newly formed intermediary Bridging trade body) is actively encouraging introducing brokers and IFA’s to look at both the potential upside and possible pitfalls of bridging finance. There are many instances where a bridging loan can greatly assist to facilitate a house purchase or refinance.
“As long as the customer, intermediary and lender all communicate clearly and effectively and there is a definitive exit strategy in place, bridging finance will always have a place in the market.”
By Katie-Jill Rowland