Bridging lenders benefit from capital adequacy rules

A survey of mortgage brokers carried out by West One showed the number of owner occupiers which represented bridging loan customers rose from 16% in February this year to 18.2%.

Duncan Kreeger, chairman of West One Loans, said the problem lay with the mainstream mortgage market’s inability to do its job properly.

He said: “Five years into the credit crunch residential lending is still a fraction of what it was during the boom as banks desperately shore up their capital reserves. Households can’t get the credit they need from the high street banks and as a result more owner-occupiers than ever are turning to bridging.”

Kreeger said the Bank of England's Financial Policy Committee has now told banks to raise even more capital to build up their capital buffers to cover the risk of losses on loans to borrowers who may struggle to repay which means they have even less money to lend to borrowers.

Results from the survey also revealed a rise in the number of owner occupiers turning to bridging lenders for finance to refurbish properties. In February 8% of brokers listed purchase & refurbishment as the most popular use for bridging which has now risen to 15%.

“There’s a huge housing shortage in Britain,” said Kreeger. “There are many ways the government could solve the problem from building on the Green Belt and liberalising planning regulations to turning up the heat on the redevelopment of brownfield sites or increasing taxes on second homes.

“At present none of these things are happening and, as a result, there are too few homes to meet demand. That’s keeping prices artificially high and pushing more and more people and developers to borrow from bridging lenders to buy dilapidated, inhabitable properties which mainstream lenders won’t offer a mortgage on.”

While the Bank of England and Financial Services Authority said Barclays, HSBC, Lloyds and Royal Bank of Scotland would collectively need to raise between £5bn and £35bn of capital, peer to peer lenders like West One Loans match a pool of investors with individuals looking for short term secured loans.

And brokers said they are writing 51% more bridging business compared to twelve months ago.

Meanwhile the West One Loans bridging index showed that in the third quarter of 2012 quarterly gross lending grew by 14% to £399m up 65% from the equivalent period in 2011.

Kreeger said: “Mainstream lenders are being squeezed between higher capital adequacy requirements and the lack of confidence the money markets have in them. Although we only lend to landlords and developers who want commercial loans the high street lenders’ pain has been our gain.”