There has been a substantial rise in the amount of bridging finance that has been raised by businesses and private individuals over the last couple of years. Bridging loans are used for many reasons but have been increasingly used as an alternative method of finance due to more traditional lenders being unable to help due to greater restrictions in their underwriting.
The UK property market is struggling and most lenders need to see improvements in the values of residential and commercial property in order to encourage them to relax their criteria and increase lending.
In order to help provide a much needed boost to the property market the UK coalition government have come up with some interesting proposals. These proposals are designed to alleviate some of the different problems that the property market is struggling with. The main problems are recognised as being that builders and property developers need to be encouraged to start building new homes and first time buyers need to be able to obtain mortgages in order to be able to buy their first home and get a foot on the property ladder.
To encourage property developers the government has targeted developers who already own land which is lying undeveloped because it is not financially or economically viable for them to start building on it. Developers who have land lying undeveloped for this reason will be able, under these new proposals, to apply for subsidies to help finance the new development. It is hoped that this will provide an increased supply of new homes, create jobs and stimulate the property market. Such developments will surely be of interest to lenders who will need to provide development finance and bridging loans in order to further finance such projects.
Money will also be made available to local authorities so that they can invest in new infrastructures that will in turn enable and help new developments.
Of particular interest is the new proposal to help first time buyers obtain a mortgage. Currently first time buyers are restricted to 75% and 80% mortgages meaning that they need to find quite large deposits in order to buy their first home. The new proposals will mean that first time buyers will only need a 5% deposit as lenders will once again provide 95% first time buyer mortgages. The mortgage companies will be encouraged to do this because the government will guarantee a proportion of the mortgage in the event of repossession. Therefore the mortgage companies will still only be carrying a risk of up to 80% because the buyer will be paying 5% and the government will be guaranteeing 15% in the event that payments are not made and the property has to be repossessed.
These are all interesting proposals which will all combine to hopefully help provide the property market with a big boost.
In the years since the credit crunch and the start of the economic downturn bridging finance has increased in popularity. Over the last two years the amount of money borrowed through bridging loans has increased by over 50 per cent.
There are many reasons for the increased activity in the bridging finance market. One reason is the decreased activity in the housing market which has made it more difficult to buy and move home. Trying to get a sale and purchase completed in order to move house can have many more problems than just before the credit crunch.
Since the credit crunch trying to find a buyer for your home, then obtain a decent sale price and most difficult a suitable mortgage, has all become much more difficult and complicated. All these added problems have made the whole process of trying to complete when buying and selling a home at times impossible.
Bridging loans have often provided a solution that has enabled completions and sales to happen. The depressed housing market has led to people having to be more flexible with completion dates in order to allow purchases and sales to happen. Bridging finance is often used to bridge these gaps between the purchase of a new property and sale of the old one, allowing a sale chain to become possible.
Due to lenders tightening their criteria many property investors have found it difficult or impossible to find finance facilities through their previous sources. Consequently they have turned to bridging finance and the much more flexible lending criteria offered through bridging loans.
Many property investors will use bridging finance to help fund the purchase of property that is run down and in a poor state of repair. They may also use a bridging loan to provide the money required to carry out building and restoration work to a derelict property. Bridging finance is often used to fund purchases of or restoration work to run down properties because many traditional lenders will not provide finance secured on this type of property.
However, once the work has been completed more lenders will then consider providing finance secured on it. This enables property investors to raise more traditional long term finance facilities, such as buy to let mortgages, which can be used to repay any bridging loans taken out to purchase and restore the property.
In these difficult financial times bridging finance has allowed some property developers to continue trading.
Since the credit crunch obtaining finance has been much more difficult than it had been previously. This is because investment in the money markets decreased considerably because huge sums of money were lost due to bad debts from lending.
To try and prevent this from happening again the banks and other finance institutions introduced stricter lending criteria, which combined with the fact that the lenders have less money to lend, has made borrowing more difficult and also generally more expensive. This has particularly hit the mortgage markets making it more difficult for people to obtain mortgages to move home and particularly noticeable to buy their first home, as first time buyers have been hit hard mainly due to the requirement for larger deposits.
Commercial mortgages have also been more difficult to obtain along with other secured borrowing.
However, bridging finance has increased considerably over the last couple of years. This has a lot to do with the problems previously mentioned, which has forced people to take advantage of the more flexible underwriting offered through bridging loans. The higher deposits required for many types of mortgage due to lower loan to values has seen bridging loans being used to raise additional funds to bridge gaps in available deposits.
Bridging loans have also been used to secure deals that would have normally been financed through a business’s normal banking facilities. Due to the tighter underwriting, problems may arise that wouldn’t have prior to the credit crunch, forcing customers to look else where for finance.
Despite the slower economy bridging finance has seen a large increase in lending, what we need now is an improvement in the economy so that banks and investors can become more confident and start money flowing again.
When there is confidence people spend money, which in turn is spent and so on. When people lose confidence money is held on to, which stops the cycle. One of the main problems facing the large economies at present is China’s reluctance to spend the huge sums of money that they have accumulated over recent years. China are looking at the problem, because they can help provide a boost to the World’s economy by spending or releasing some of this money that they have acquired. This is also in China’s interest because by boosting the World’s economy people will be able to continue to buy goods from China. A slower World economy will also affect China, so they need to be confident and spend some of this money.
Such actions will surely help to improve confidence and see lending criteria relax and finance deals improve.
There has been a significant increase in the demand for bridging finance. Since January 2010 there has been an increase of a little over 50 per cent for bridging lending.
The increase has been due to a number of reasons. Due to their flexible underwriting (in that many bridging lenders don’t require income confirmation or credit checks), bridging loans have traditionally been used as a method of raising money for short periods of time or to raise money quickly. They have also been popular when funds are required for renovation, expansion and restoration because many bridging lenders will provide bridging loans secured on property that is in a poor state of repair.
This flexible underwriting has made bridging loans useful when in the past they would not have been required. Since the credit crunch the banks have tightened their lending criteria and consequently are unable to provide finance facilities that previously may have been available. These previous facilities may have been useful to in particular commercial customers who may have been able to secure commercial mortgage facilities quickly or on property that may need a little repair. This tighter underwriting has led to a growth in commercial bridging loans being taken out where the banks can no longer help.
Similarly the growth in the demand for rental properties has seen more people wanting to invest in residential rental properties. To secure the best deals properties often need to be purchased quickly, and quite often they can be in a poor state of repair. When the buy to let mortgage providers are unable to lend due to the condition of the property a bridging loan is often the only option, and can of course be in place quickly. Once the repair work has been carried out and for many lenders at least 6 months has passed since purchasing the property, the rental property can be remortgaged with a commercial or buy to let mortgage in order to repay the bridging loan and sometimes if required raise additional funds to help fund the next project.
Since bridging finance is becoming increasingly popular by landlords looking to acquire and restore property, and there is a high demand for rental property, it is clear to see why this has caused a growth in bridging lending. If is also probably fair to assume that due to finance being unavailable through their traditional sources due to tighter underwriting, some companies and individuals will raise the finance that they require through alternative methods, which may often be bridging finance.