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|Bridging lending burgeons as borrowers benefit from rate war: West One Bridging Index|
|Friday, 23 October 2015|
Annual gross bridging lending increased by 27% in the twelve months to the end of August, according to the latest West One Loans Bridging Index. This marks a slight slowdown on the previous two-month period, but represents a significant annual increase.
Short-term lenders are now providing almost £2.9bn of finance on an annual basis, up from £2.2bn in August 2014 and the £2.8bn recorded in the 12 months to the end of June 2015.
The bridging market’s significant annual gains – buoyed by borrowers capitalising on record low rates – are in stark contrast to the marginal growth of the mortgage lending market, where house purchase lending grew by just 2% annually, according to the latest figures from the Council of Mortgage Lenders (CML).
Duncan Kreeger, director of West One Loans, says: “While the mortgage market has witnessed year-on-year growth, the rate of improvement is negligible and significantly behind the bridging lending market. The mainstream home loan sector is also hostage to more monthly volatility than the short-term finance market, as evidenced by the 9% dip the CML reported in August.
“Bridging lenders and brokers have defied any suggestions of a seasonal slowdown and have worked hard throughout the summer to complete deals, with this stellar service and competitive interest rates helping maintain the attractiveness of bridging lending as a short-term finance solution. The £3bn annual lending milestone is now very much on the horizon and it is up to lenders and intermediaries to keep the momentum going and tick off this historic landmark. At the rate we’re going, it would represent a welcome Christmas gift for all stakeholders in the short-term finance sector.”
Trends in the Bridging Industry
Loan volumes have checked back slightly from the highs seen in April and May, but continue on their overall upward trajectory thanks to a 12.2% annual improvement.
Typical loan sizes have displayed no such reticence as they continue their inexorable rise. The average bridging loan is now worth more than £780,000, a 48% increase on the £526,000 registered for the equivalent period last year.
Duncan Kreeger adds: “With the economic recovery ongoing, borrowers are becoming increasingly confident in the capacity of short-terms lenders to meet their requirements and feel increasingly comfortable using bridging loans for large projects.
“But bridging lenders are equally adept at handling smaller requests for finance as they are larger loans and will always assess each case on its individual merits. One of the fundamentals underpinning the bridging sector’s success is this adaptability and flexibility.”
Loan to value ratios
Loan-to-value ratios continue their downward trajectory, falling to 48.3% in the two months to August, down from 48.7% in the previous period. However, on an annual basis, typical LTVs have risen by 1.1%.
Duncan Kreeger comments: “One of the bridging sector’s main virtues is its sensible stance on risk and it has steadfastly refused to embrace borrowers with insignificant deposits. Typical LTVs have only occasionally strayed north of 50%, a statistic rendered even more impressive when you consider that average loan sizes continue to rise. It all means that despite the runaway success of the bridging lending sector, lenders and borrowers are keeping their feet firmly on the ground.”
Bridging Interest Rates
Average bridging interest rates have continued to fall over the past few months, with the typical rate for the two months to August standing at 1.15%, down from 1.20% in the eight weeks to June 2015. The average interest rate for the year to August 2015 is 1.16%, which is slightly down from 1.17% for the 12 months to August 2014. However, while the average currently stands at 1.15%, headline rates are available from as little as 0.59%.
The spread between the returns from backing bridging and 10-year government bonds currently stands at 1%, slightly down from June’s figure of 1.06%.
Duncan Kreeger concludes: “The global market turmoil has persuaded the Bank of England to hold off from raising interest rates for now, but a rise in the near future is inevitable as the Base Rate can’t stay at 0.5% forever. This will certainly be on the minds of lenders and borrowers and they would be advised to make hay while the sun shines in terms of taking advantage of the current crop of competitive rates on offer, but any rate rises when they come are likely to be gradual rather than abrupt hikes. That said, lenders are jostling for market share with rates available from as little as 0.59% and tactics usually seen in the mainstream sector such as free legal fees are increasingly common as short-term finance providers aim to attract business.
“It’s something for the bridging market to be mindful of, but it will take more than a few rate rises to derail the powerful express train that is the short-term finance sector. However, in the fight for business, bridging lenders must remember to price for risk and not engage in a race to the bottom in terms of rates.
“We’ve long helped educate intermediaries as to the benefits of the bridging market and we continue to make strides on the investment front in terms of making it as straightforward as possible for depositors to reap the rewards of the market’s success.”
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