Bridging finance said to be growing in volume – and complexity

Demand for bridging loans expected to grow in difficult conditions

Bridging finance said to be growing in volume – and complexity

Demand for bridging finance is expected to grow amid economic uncertainty, while becoming more complicated.

Chris Oatway (pictured), chief executive of LDN Finance, said bridging enquiries are becoming more and more complex, which adds to the levels of underwriting that need to be done.

“The rise in rates has not impacted enquiry levels or the ability to make deals happen, but there is increased difficulty at every stop of the way to get to completion,” Oatway said.

However, he believes that, due to difficult market conditions, demand in the bridging sector is set to increase this year.

Bridging finance for properties sees growing demand

Oatway believes the bridging sector will continue to be very strong over the year, and that the market will grow further.

“There are multiple reasons why I see business levels increasing in the bridging sector, and complex borrower income is certainly one but not the main factor,” Oatway said.

He added that factors increasing the need for bridging loans include the general state of the current property market, including opportunities for funding chain breaks and restrictive mortgage lending due to tightened lending criteria.

Something he is also seeing a lot more is the value of commercial assets creeping down, combined with interest rates going up.

“In many asset classes, the interest rate is pretty much at the same level as the yield, which has made certain investments come under financial pressure and less appealing to hold within a portfolio long term,” Oatway added.

He also believes there will be many more cases where clients use bridging finance as a tool to either acquire sites, get more time to sell, or provide additional funding to support transactions.

Oatway said demand will be high, and more importantly, that there will always be competition for bridging lenders to grow their loan books to ensure client demand will be met.

“Brokers are likely to lean on their trusted partners in the bridging sector with the focus on getting deals over the line stronger than anything else,” he added.

Interest rate competition grows

In general, Oatway said, bridging lender rates are positioned higher than they were 12 months ago, with some lenders passing on the full impact of the base rate rise.

“This is normally due to their own funding lines being linked to the base rate, so for them to ensure they maintain profitability, they have to pass on the increase,” he said.

However, Oatway said some lenders have continued to keep their rates at lower levels, and in some cases, where they were not previously market-leading, they have now placed themselves top of the list in the market.

New applications remain strong

Adam Tyler, executive chairman of the Financial Intermediary and Broker Association, said the overall market seems to have had a very pleasant surprise, as the expected decline in enquiries has not materialised.

Tyler said the market reaction from lenders and brokers has been extremely positive, and added that both are dealing with a very consistent flow of new applications of good quality.

“This is not a case of customer approaches that have been around to a number of different places, but are new to the market and are very doable deals that fit a tighter criteria than would have been applied even six months ago,” he said.

If you combine this with the cost of customer borrowing being higher as funding lines have become more expensive, Tyler believes this still has not prevented the consideration of short-term borrowing as an appropriate solution.

Awaiting the peak in interest rates

Tyler said the changes to the marketplace, as higher interest rates affect not only the cost of borrowing, but deeper underwriting against stricter terms as well for any potential customer, would certainly point to a lower number of completions as the year progresses.

“At the moment, this outcome has not been fully forthcoming and lender activity in their search for origination also does not reflect a lesser appetite to lend short-term to customers in the forthcoming months,” he said.

Tyler added that the key will be the peak of the interest rate rises, and while he conceded how much further we need to go is still an unknown factor, he said there are more positive signs.

“We should be hopeful that good quality requests from customers looking for sensible loan-to-values, with good security and a proven exit, will continue to materialise in the brokers’ enquiry boxes and subsequently presented as applications to our bridging lenders,” Tyler said.

What are your expectations for the bridging market in 2023? Let us know in the comment section below.