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The property lending market has changed substantially over the past ten years, mainly due to the emergence of so-called challenger banks – along with significant growth in bridging short-term finance.
In simple terms, these are short-term loans secured against property, usually for a maximum of 12 months, whereby the customer pays a monthly interest charge based on the loan amount until it is paid off.
The reasons why companies and individuals use this form of finance are numerous, including to purchase a property quickly, to allow a chain break on a property purchase, to release money from a property that is needed for other needs and to refurbish or develop a property.
Arguably, though, there are still misconceptions about the bridging finance sector, which has reportedly grown tenfold since 2010.
The market has become more sophisticated, with lenders attracting many highly experienced underwriters and credit teams who used to work for high-street banks. The customers who use bridging finance have become more sophisticated too – including experienced property investors and developers – with the market worth over £5bn.
The UK lending market has changed significantly since the 2008 financial crisis, which had a profound effect on the property market and valuation profession.
Everyone who experienced it learnt valuable lessons. Established in 2013, the Financial Conduct Authority (FCA) transformed the way that regulated mortgages worked by ensuring loans were affordable to those taking them out, and repayable in the event of market decline.
The scale of the crisis meant that most high-street lenders involved in property finance had to deal with serious issues and lost their appetite to lend. Subsequently, between 2010 and 2012 several so-called challenger banks and bridging finance companies emerged to provide short-term loans.
Challenger banks have changed the status quo and taken some market share away from their high-street counterparts. Since 2013, the Prudential Regulation Authority, whose work complements the FCA's, has issued 30 new banking licences and 24 to overseas banks – something unheard of before 2008.
Bridging lenders are known for being flexible and agile, and can create bespoke finance products for their customers. For example, they can help a customer buy a property quickly or off the market, perhaps to get a good deal or avoid any other bidders.
Bridging can enable refurbishment, extension or development of houses and commercial properties. It can also allow for a chain break: if you want to buy another home and secure it without selling your own home first, a bridging loan can help you do so, repaying that loan once your main home is sold. This is particularly helpful at present, when there is a shortage of housing stock coming on to the market and buyers want to secure their future homes quickly.
The numerous reasons for using bridging finance demonstrate why the sector is so important to the overall lending market. Above all, it helps people, companies and developers move quickly.
A key criterion for any bridging lender is the customer’s repayment strategy. This must be clearly identified at the outset of the process. The customer must be able to settle the debt, normally over a 12-month period.
Repayment is typically enabled either by using money from the sale of a property or from refinancing on a longer-term mortgage with a bank, whether a challenger or a traditional high-street operator. Although some lenders are now offering both bridging and long-term products, this has evolved in response to the needs of existing clients.
The biggest challenge that valuers have faced is providing a quality, well-written report within pre-agreed timescales so that the lender can fulfil their promise to their customers, with the average bridging drawdown being less than 60 days.
One of the key benefits of using bridging finance is this speed of service, with which valuers have then had to keep up. Meeting agreed timescales has therefore become more important.
Arguably, it is vital for the surveying professions more widely and the insurance market to understand these changes in property lending. Insurers still refer to the bridging market as secondary, sub-prime lenders; however, I believe this to be a superseded term, out of step with market realities.
The bridging market is forecast to get bigger, and today it already lends more than £5bn annually. Therefore, more valuers will be given the task of writing and submitting reports in a tight timeframe.
The technology – such as easy access to comparables, flood risk and planning data, and energy performance certificates, as well as auto-populating reports to help valuers be more efficient – must be in place to ensure reports are right first time to prevent any delays.
Bridging is designed to put the loan in the hands of the customer as fast as possible, often to meet a specific deadline. Valuers must understand that time is of the essence and get to grips with the challenges this entails.