In recent weeks there has been many reports regarding rises in the amount of property sales, increases in property prices and also in lending. Figures being supplied are the healthiest for over 4 years, as finance criteria is eased making finding and obtaining mortgages and loans more achievable. In particular figures for bridging loans have shown further rises with many lenders reporting their best ever figures over the past quarter.
Leading up to the credit crunch, and subsequent recession, the UK was booming. Business for most was very good, property prices were strong and increasing, and there was plenty of money about. Then virtually overnight a series of events, mostly involving banks in the USA, changed all of this. A number of large lenders suddenly found their funding dry up and this quickly led to subprime along with self certification loans and mortgages disappearing from the market place. In addition 100 percent and other high loan to value mortgage and secured loan products also disappeared. The disappearance of so many finance facilities and the sudden tightening of criteria by most lenders, made obtaining finance much more difficult, and for many impossible.
All of a sudden individuals and businesses could not obtain the mortgages and loans that they required, meaning that property sales fell through and significantly decreased. Since people and businesses could no longer obtain finance in order to make the acquisitions that they required, demand dropped. As mortgages were severely hit, the property market suffered and property prices not only stopped rising, in most parts of the county values fell. In fact only certain parts of London have seen any increase in property values over the past 4 years.
Where many lenders have refused to lend, some businesses and individuals have turned to bridging loans in order to raise the finance required to complete purchases, or to raise capital secured against property already owned. There are many property purchases and other acquisitions that simply would have not happened if it had not been for the bridging lenders. Most of these deals would have no doubt made other subsequent deals possible, and so on. Therefore the writer does find himself wondering that had it not been for the flexible lending criteria offered by many bridging lenders, would the recession have been even more severe.
As bridging finance brokers who provide facilities throughout the UK we have a good view of the country’s property markets and are quick to notice signs of growth and decline. In recent months it has been quite noticeable that the UK property market is becoming more buoyant and property sales are increasing and becoming a bit easier to complete. We are having more requests for bridging finance in order to facilitate speedy purchases as clients are concerned about losing the property that they want to someone else. Not so long ago a property was very lucky to have one interested party, now many properties on the market can have several interested parties. This has also led to an increase in the number of offers that have been accepted by a vendor being later rejected following an increased offer from another interested party.
It is noticeable that a year ago our customers were contacting us in order to find them finance in a market place where finding the required funding was proving to be difficult. More recently we are being contacted by people looking for quick funding in order to secure their desired property before it is purchased by someone else.
During the past week it has been confirmed by mortgage providers and estate agents, that the number of properties being purchased by first time buyers is finally on the increase. This has helped the average house price in the UK to show a healthy increase, which is hugely significant because for a long time they have been decreasing. Parts of London have shown the strongest growth, but this is hardly surprising when many parts of London are unique in that although property prices slowed, they did not in fact actually fall unlike most other parts of the UK during the past 4 or 5 years.
No doubt helped by some of the Government’s economic policy, the lenders are beginning to be a little bit more flexible with regards to lending criteria. For example some lenders are once again offering 90 per cent mortgage facilities. The relaxed lending criteria has meant that more first time buyers are now able to get onto the property ladder, increasing the number of sales and helping to stimulate property prices.
Other types of lending facilities have also shown signs of being more flexible. This includes the secured loan providers, some who have significantly increased their maximum loan sizes, decreased rates and increased their loan to values. Also there have been some significantly improved credit card deals being advertised recently.
Traditionally it has been common place for first time buyers to receive some financial help from parents, grandparents or other family members when buying their first property. In the past this may have been some help with buying furniture, paying solicitor fees, helping to pay stamp duty or towards a small deposit.
Since the credit crunch many first time buyers have been receiving a lot more financial help from family members. The downturn in the economy, mainly caused by lenders being very short of funds, has resulted in much more stringent lending criteria for mortgages and other finance facilities. Consequently in order to get on the property ladder much larger deposits are required due to decreased loan to values being offered by the mortgage providers.
Typically first time buyers are required to find £20,000 to £30,000 in order to purchase a ‘basic’ property. This is a lot of money for a first time buyer to find, and many people looking to buy their first home are unable to find this. Consequently parents and their family members are helping out wherever possible, but with often having several children to help out, not many people have the sort of money required available. Family members, and in particular parents, who are keen to help, but don’t have any available funds, are finding other ways to help their children purchase their first property.
In order to get themselves onto the property ladder some first time buyers are purchasing properties that are in need of renovation and improvement. These properties are often unsuitable security in order to obtain a mortgage on due to them being uninhabitable. Therefore funds to purchase the property are provided by a family member who raises the required money through a bridging loan secured against their own property. Once purchased the plan is to restore and improve the property in order to increase its value whilst also returning it to a condition that will make it suitable security for mortgage purposes. Once completed the property is remortgaged using the funds raised to repay the family member who lent them the money, who in turn repays their bridging loan.
In these circumstances parents are making it possible for their children to get onto the property ladder by releasing money tied up in equity in their own property. By purchasing correctly and being prepared to do some work, increasing a property’s value can mean that the money provided can be repaid in full and within a short period of time. There is of course an element of risk, and before undertaking something like this you need to do thorough research and be prepared to do some work.
Bridging finance can help capitalise on profitable opportunities when planning is obtained for additional properties in your garden
A popular and often very lucrative opportunity is gaining planning permission for one or more additional properties on a portion of the land that makes up an existing property’s garden. Once the planning permission has been obtained the owner can either sell the plot, or plots, for development or build on the land for themselves. Deciding to build will often mean that finance is required to fund the project and this can be raised through the use of property development loans or bridging finance.
Even if the building plots are to be sold then there may still be a requirement for some finance. This would typically occur if there is already a mortgage facility on the property, likely to date back to when the property was originally purchased or a time when the property was remortgaged. An existing mortgage facility will most likely be secured on the original property and land, so to split the building plots so that they are on their own set of deeds will require the permission of the existing mortgage provider.
Mortgage providers are not always that cooperative and may refuse any request to give up some of their security, or may indeed agree to do so, provided some of the outstanding balance is repaid to compensate them for effectively agreeing to take less security for their loan. However, sometimes the ways in which the mortgage providers want to achieve this isn’t always convenient. Indeed it may be that once the plots are sold, or have been developed and sold, it is the intention of the owner to clear the existing mortgage completely from the proceeds received from the sales. Alternatively the owner may want to rent the properties out, so intends to raise buy to let mortgages in order to repay any development or bridging finance.
When it is impossible to move forwards with this sort of development due to awkward mortgage providers, a possible option can be bridging finance. The funds raised from bridging finance can be used to clear any existing mortgages and can also fund any other work that needs to be carried out, for example putting in the services, in order to enable the sale of the plot or plots. If looking to develop the sites for them self, a bridging loan can also provide the funds required to pay for the development. At the end of the development the properties would be sold or refinanced in order to repay the bridging loan. Alternatively development loans can be used to fund such projects.
The Christmas break is a great time to consider what the next year is likely to hold in store for an industry that is still trying to recover from all the problems that it has experienced during the past four years. The team at KIS Bridging Loans have all been involved in the finance industry since at least the 90s, so have had to get used to dealing with all sorts of changes from economic to regulatory. Being well prepared to deal with the coming years business is important so that we can continue to run efficiently and ensure that we keep providing our customers with the best finance deals available. We therefore have to look closely at how the buy to let mortgage, secured loan, commercial mortgage, development finance and of course bridging loan markets are likely to change over the coming years and in particular throughout 2013.
For various reasons the bridging loan market has experienced significant growth over the past couple of years. Because other finance facilities are unlikely to change that dramatically over the next 12 months, and with bridging lenders becoming even more competitive, and also more interested in taking into consideration customer requirements in order to provide more suitable bridging loan facilities, we expect this growth to continue and are therefore preparing ourselves accordingly.
We also expect to see the secured loan sector to continue to grow at a healthy rate. The secured loan industry was virtually wiped out following the credit crunch, with many lenders leaving the market. Those that remained dramatically reducing their lending by making considerable changes to their lending criteria. Recently more lenders have returned to the market and secured lending has seen a healthy growth during the last twelve months. In addition one of the main secured loan lenders has increased their maximum loan size from £100,000 to £250,000 and also introduced a rate of just 5.59% APR, one of the lowest rates ever seen for a secured loan! With lenders recognising that this is a profitable market for them there will surely be plenty of business written during 2013, especially since secured loans provide an excellent alternative to a remortgage when looking to raise money for home improvements and debt consolidation. With remortgages still being hard to obtain plus unfavourable rates, a secured loan can be a very attractive option, especially if these lenders are reducing their rates.
It is hoped that the construction industry will experience some positive growth during the next twelve months. New government policies and incentives will hopefully help this industry experience some positive growth, having been hit so hard over recent years due to the UKs financial problems and more recently the poor weather. Growth here will mean a growth in development finance, and although there are many lenders still with some demanding criteria, there are many new options available that can provide the development finance required for new projects.
Many businesses are still finding it hard to obtain commercial mortgages from the high street banks. Hopefully 2013 will be the year in which the high street will look more positively at providing commercial loans and mortgages. However, if they don’t be reassured that there are other options available from alternative lenders who are keen to make commercial mortgages and loans available to businesses. The last twelve months has seen new alternative lenders enter this market and there is no reason why this won’t continue over the next year, meaning more available options to choose from and better deals.
The whole team at KIS Bridging loans is looking forward to 2013 as we believe it will be an interesting and busy year. Hopefully this will be the year in which the UK turns the corner and starts to look forward and enjoy some financial recovery!
Despite last year seeing some big name bridging loan providers closing their doors there is an increasing number of lenders entering this market. With a growing number of lenders we can probably expect some lower rates and set up costs plus hopefully some more flexible lending criteria. If property values show strong positive signs of increase during 2013 then hopefully we can expect to see bridging loan LTVs also increase.
On a negative note with the prospect of increasing fraud attempts, there is the likelihood of more security measures being introduced by some of the bridging loan providers. One major lender introduced late last year the requirement for all customers to be interviewed by a representative in order to confirm their identification. Other lenders who have had any suspicions about applications have been known to request customers to visit them, or have sent representatives to the client, before payout. These extra measures may become a necessity in order to avoid becoming the targets of large frauds that could spell financial disaster to a bridging lender.
Hopefully this coming year will see the major high street banks increase their willingness to provide commercial mortgages and loans. As independent commercial finance brokers, we always look to find our customers the best possible deals for the commercial mortgages and loans that they require. However, when the high street banks will not provide the funds required, we do have an increasing number of facilities from alternative commercial mortgage providers. These alternative lenders offer more flexible underwriting and often higher loan to values than the high street banks. The interest rates are usually a little higher than those provided by the high street banks, but do provide an excellent alternative source for commercial mortgages.
The number of secured loans provided during the last 12 months has seen an increase when compared to the previous couple of years. This increase in expected to continue during 2013 for a number of reasons. New lenders entering this market in addition to previous secured loan providers returning to the market are helping to provide more competitive rates, higher loan to values and flexible underwriting that will take into consideration some adverse credit and a low credit score. With mortgages and remortgages being difficult to obtain and some old mortgage facilities charging much lower rates than can be obtained on any new facility available today, secured loans can be a very attractive alternative to a remortgage. This has been further helped by the recent introduction of secured loans facilities for amounts up to £250,000!
Leading on form our previous article last week concerning an attempted bridging loan application for £1.5 million that was a fraud. With increasingly clever attempts to commit fraud, bridging loan brokers have to be increasingly vigilant when dealing with new applications. It is very much anticipated that this problem will get worse throughout 2013 and beyond across bridging and other finance sectors.
Overall these types of thefts are widely considered to likely increase throughout 2013, due to the slow economic growth forecast for next year in addition to cut backs made to benefits. This is due to the Government looking for different ways to make cutbacks in order to reduce its expenditure and borrowing. Consequently more people are likely to be tempted by the money that can be obtained by committing frauds and other crimes such as shoplifting, which has also seen a recent increase.
Furthermore it is thought that more mortgage frauds are also likely to be committed. This is partly out of desperation to obtain mortgages where many people are unable to do so due to the tighter underwriting criteria in place since the economic downturn. These sorts of frauds will most likely involve applicants lying about their employment status and income, plus other false representations in order to hide poor credit histories.
People looking to commit frauds are helped by the vast resources available to them online where it is easy to find out details about peoples’ names, dates of birth and addresses. Other information that is easily obtained includes property details such as purchase price, valuation and details of any mortgages secured on the property. Modern day scanners and printers are also helpful and used to create false documents.
The reason why bridging loans are a popular target for the more serious fraudster is because they take advantage of the flexible underwriting criteria offered by the bridging lenders. This flexible approach can mean fewer checks which are designed to make the process of obtaining a bridging loan quicker. With fewer checks there are fewer opportunities for lenders to detect the fraud, making them a popular target.
Other easy targets that are proving to be a significant problem for the banks are credit and debit cards, and there has been a huge rise in the theft of money from accounts as criminals make unauthorised purchases and cash withdrawals using card and payment information that they have obtained.
Similarly insurance fraud costs the insurance industry millions every year. In an effort to fight and deter this crime insurance companies have been increasingly sharing information between themselves and other agencies. They are looking for people who are perhaps making false claims, and look at many factors to help identify insurance fraud. For example insurance investigators will look very carefully at someone who has made an above average amount of insurance claims or someone who is perhaps suffering financial hardship and an insurance claim suddenly being very helpful indeed. This of course is not to say that claims that may tick these boxes are false and fraudulent, it just lets investigators know which claims they should perhaps look especially close at.
More systems like this should be adopted within the bridging loan industry and lenders should share information amongst themselves. For example the team mentioned earlier who carried out a well thought out £1.5 million attempted fraud, were also in the process of carrying out a similar fraud from another finance provider. Another team of fraudsters successfully stole £300,000 from another bridging loan provider, but before they managed to do this they used the same plan against another lender and on this occasion failed. A security system operated between the different bridging lenders similar to that used by insurers, could well have prevented this £300,000 fraud.
Generally 2012 has seen some small improvements with regards to lenders providing more finance in 2012 than they did in 2011. However there is a long way to go with regards to commercial mortgages and residential mortgages. Other methods of finance such as secured loans have seen a more significant growth during the last twelve months, whilst bridging finance has seen lending once again almost double.
The growth in bridging finance is partly due to increased competition within this industry that has made this type of short term funding a more attractive proposition when compared to some of the alternatives. In addition growth has also been due to the flexible lending criteria provided by the bridging providers, which sometimes means that bridging finance is the only available option.
Unattractive mortgage deals means that there is a healthy demand for secured loans. This is because homeowner’s who want to raise large sums of money to carry out home improvements, or perhaps consolidate credit cards and expensive unsecured finance agreements, are put off remortgaging because their existing mortgage facility is a much better deal that they can replace it for. Borrowers who have a mortgage that was taken out before the credit crunch should be very careful about remortgaging because they could well be on a much better deal than they could possibly find today.
Many borrowers think that they should remortgage as soon as their existing discounted or fixed rate deal comes to an end. Before doing so they should carefully check the term of the original mortgage offer because they may well find that after the ‘promotion period’ is over their new rate is based upon a percentage, such as 1%, above base rate. Therefore a 4.99% fixed rate could finish and turn into a 1.5% variable rate! Borrowers are often unaware of this as they don’t check their old agreements and before their existing deal ends and the new low repayment kicks in, they are often contacted by their brokers or lenders who offer a new promotion which they automatically agree to.
The secured loan industry has experienced their best year since 2009. This growth is likely to continue next year, as a secured loan will often prove to be a better option than a remortgage, for people who have a better existing mortgage deal than any new deal that they may be able to find. In addition secured loans offer more flexible underwriting than a mortgage, so can offer a means of raising funds when a homeowner is being turned down for a remortgage.
Mortgages still haven’t changed significantly during the last 12 months. There are some lenders offering mortgages with slightly lower deposits, but the important fact is that significant deposits are still required. Some builders are teaming up with some lenders to offer share ownership schemes, in which the builder provides up to a 30 per cent deposit to buyers, in an attempt to help sales and build more homes.
Yesterday the BBC TV series ‘You’ve Been Scammed’ featured a story about a group of fraudsters who tried to obtain a fraudulent bridging loan for £1.5 million pounds from well known bridging loan provider Masthaven. The program explained how the team of fraudsters put together and executed a plan to obtain a £1.5 million bridging loan and how underwriters at the bridging company suspected and detected the fraud which led to the team being arrested.
The plan started with a false application from two men claiming to be wealthy Arab brothers. They wanted to use an expensive London flat as security, which was owned outright by the Arab brothers they were impersonating. To help in their deception they chose a vacant flat without any mortgage that was advertised for sale. They also had false passports and utility bills to help pass themselves off as the Arab brothers. The flat being on the market enabled them to obtain access through the estage agents for the necessary valuation.
All was going well with their plan until Masthaven informed the borrowers that they would need to meet them personally, which was their policy for bridging loan applications of £1 million and above. In an attempt to avoid this unexpected meeting the fraudsters reduced their application to £925,000 which led to underwriters becoming suspicious. Due to their suspicions they carefully checked the utility bills to then discover that they were in fact false. Masthaven then contacted the police who discovered that the passports were also false.
In order to try and trap the fraudsters Masthaven continued with the bridging loan application and claimed that the loan was ready to complete but they would need to meet the brothers face to face before they would release the funds. This led to a meeting in a London hotel where two gentlemen, dressed in Arab dress with tea towels on their heads, were arrested. In all 6 arrests were made, of which 3 people pleaded guilty to offences relating to attempting obtaining funds by deception and also for using a false instrument in order to commit fraud. The other 3 pleaded not guilty and went to court where 1 more was found guilty and 2 were cleared.
Some of the gang members were very knowledgeable about how different finance facilities including bridging loans work, plus the processes and checks carried out by the lenders and solicitors when arranging this type of facility. To help pull off their planned crime they had obtained false utility bills, passports and had also checked with land registry to find a property that was unencumbered and to learn the details of the owners, who they later impersonated.
Financial fraud is a big problem, and although this one was prevented, many are not and this costs the lenders an estimated amount of £1 billion every year. These costs are of course passed onto their customers, who are you and me. In addition efforts to prevent fraud mean that every application has to be checked closely and this leads to delays, extra work and frustration for not just the bridging loan providers but also the brokers and the customers who are looking for a speedy and simple completion to their application.
Before taking out any bridging loan it is very important to be sure of your exit strategy, which is the method by which you are planning to repay the finance facility. Entering into any short term loan agreement without a suitable exit strategy can prove to be very costly. Bridging loans have their uses, but when compared to other finance facilities that provide large amounts of funds over longer terms, their higher monthly rates of interest can make them an expensive option. In addition many bridging or short term loan facilities are expected to be repaid by the due date and failing to do so can lead to considerable additional costs.
There are bridging loan providers who will happily extend their facilities past the original agreed term. However, others will charge large penalties for being late or high renewal costs, and there are some who will immediately start legal proceedings looking for repossession. Therefore if your exit strategy is not reliable with regards to timeframe it would be a good idea to think again about taking out your proposed loan, or opt for a lender who is easy going about extending the facility.
Typical exit strategies for repaying bridging loans include using the funds from the sale of a property, business or shares, cashing in investments, from the proceeds of repayment of a debt, inheritance, a business transaction or other money expected and refinancing. The two most common exit strategies are the sale of a property and refinancing, with the bridging loan being used to bridge a financial gap whilst waiting for a property sale to complete or whilst waiting for a long term finance facility to be put in place. The later is often because a property being used to provide security for a long term facility is having improvement work carried out in order to make it suitable security for a traditional lender.
When relying on the sale of a business or property in order to repay a bridging loan it is important to ask yourself how long it is realistically going to take to achieve sale. Questions to ask are how long it will take to find a buyer and then how long will it take for the buyer to complete their purchase. Therefore you will need to consider how long it might take a buyer to obtain the necessary finance, if they are not a cash buyer. It is also a good idea to take into consideration possible delays, such as a buyer pulling out last minute, meaning that you may well be back at square one trying to sell the property or business. In the event that finding a buyer is difficult you may want to consider what price you may have to accept in order to achieve a quick sale and more importantly would you be prepared to sell at this price. If you are not prepared to sell at this price you may want to reconsider taking out a bridging loan in the first place.
The other common exit strategy is refinancing and care should be taken before taking out a bridging facility that your proposed method of long term finance is indeed available. Since the credit crunch lenders are very selective and there are very few guarantees in the world of finance these days. Therefore if you have any doubts with regards to your refinance options you may want to consider other options that are available to you in the event that you cannot secure a suitable long term finance facility.keep looking »