Bridging shouldn’t be the answer to tougher affordability tests

Commentary

22 Apr 16

I recently saw some research by MTF that found a rising number of brokers are resorting to bridging loans for clients who fail to secure a mortgage. I was surprised to find that in the fourth quarter of 2015, more than half of brokers turned to bridging finance as an alternative source of funding to fill a liquidity shortfall. Bridging loans are often a viable solution for temporary liquidity shortfalls, but for more long-term affordability issues, bridging shouldn’t be viewed as a panacea.

Change in perceptions
Long gone are the days when bridging loans were considered a last resort for funding and no doubt the market’s recent success is thanks to a change in perceptions around bridging. As more lenders have entered the sector, bridging products have become both more sophisticated and accessible to the wider market. However, the recent flurry of regulatory regimes has placed perceived barriers in the way of BTL landlords – and as often is the case, the less experienced investors are set to feel the brunt of these changes.

Tougher regulation
The PRA’s consultation around introducing tougher affordability tests is the latest of these proposals. Many professionals in the sector have already touched upon the fact these changes may well be to the advantage of those operating in the specialist lending space. Nevertheless, regardless of the outcome of the consultation, brokers should not be tempted to revert to using bridging facilities as anything other than a short-term solution to funding.

Delaying the problem
When considering the suitability of a bridging loan, the focus should always remain around the client’s exit strategy. Generally, borrowers who can’t achieve a mortgage for short-term affordability reasons will only use a bridging facility if they plan to exit through the sale of a property in the near future. With the PRA’s proposal applying to new BTL landlords, I can’t imagine an exit through sale would be the end-goal for most investors. If not, a bridging loan would only defer the problem rather than solve it. For cases where unique circumstances mean that clients do not currently meet the criteria for more traditional funding solutions, for example if they’ve recently taken a new job, or are awaiting capital from something like inheritance tax, then bridging loans are of course a reasonable option. It is the temptation to stray from the traditional principles of bridging that may pose a problem.

Ultimately, the aim of tougher affordability tests is to build a sustainable market and if that means a market readjustment then so be it, I don’t think the consequences are too troubling and investors will start to accept the new norm. My hope is that both brokers and lenders will continue to act in the best interests of their clients. The specialist lending market should take full advantage of these changes, but in areas as specialised as bridging, the emphasis must remain on ensuring all lending is appropriate. As regulators continue to introduce added protections for borrowers, we too should recognise our responsibility to maintain a sustainable market.

 

By Lucy Hodge, Director, Vantage Finance