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No Brexit Deals and Bridging Loans

There is less than 6 months before UK officially leave the European Union. We are yet to see what kind of a deal Britain will leave with.  What does this mean for Britain’s alternative finance industry especially the bridging market?

UK’s departure from the EU without a Brexit deal might mean a rise in interest rates.  We have already seen a base rate rise to 0.75% in August and the Bank of England is not expected to raise the rates until next year.  However, the Bank of England may be forced to raise rates to defend the pound if no deal has been agreed on.  We have already seen the fluctuations of the pound since the referendum. Trevor Williams of Derby university has said that ‘bridging loans could become more expensive as if the risk is greater the lenders are likely to want better returns for it.  He has also predicted a tougher environment for investors.

At the same time, some also argue that we may see a repeat of falling house prices and the Bank of England might have to reduce the rates and will have to relax the rules around the housing market.  KPMG the accountancy firm argues that the Bank of England is unlikely to increase the rates due to the uncertainty that looms over the economy.

Interbay, the lender has found that over 52% of brokers feel that reform to the tax legislation will boost the bridging market.  19% of brokers according to Interbay, felt that the removal of the 3% additional stamp duty for landlords would help to drive growth in the market.  Some brokers also believe that the greater regulation in the sector will boost growth in the bridging market.

The last decade has seen the rise of the alternative finance market to 4.6 billion.  The government has made housing more affordable with help to buy and other schemes which have helped the large construction companies.  The smaller developers and investors have been turning to the specialist lending sector.  Bridging and other specialist lenders offer them quick short-term funds to get their projects started. Arrival of new or more lenders in the industry has meant more competitive prices than ever before. This is has led to the growth in the alternative finance industry.

To have continued growth in this sector, the focus should be to educate people of the availability of these options in the market and educating people that mortgages are not the only option available to the borrowers or to educate brokers who shy away from alternative finance about the pricing and criteria.

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Bridging Loans

The most (and least) popular reason why investors applied for a bridging loan in Q2 2018

Bridging Trends, a quarterly publication that reports on key trends of the bridging finance market and short-term loan industry, has recently released their report on the latest trends for Q2 2018 – and the results are interesting, to say the least.

The biggest increase in the use of bridging loans has been for refurbishment purposes: up to 34% in Q2 from 18% in just Q1 2018. This signals that the UK bridging market, both supply and demand, is resilient even if growth is not at the same levels as it was in 2013. Despite gloomy Brexit predictions, people are still very much in need of a product that most mortgage lenders do not offer.

In fact, refurbishment has proven to be the most popular use for obtaining bridging finance this quarter, making up almost one third of the purposes why investors opt for such a loan.

Clearly this surge shows that landlords and property investors aren’t going to stop expanding their portfolios anytime soon.

Whether it’s converting properties from other uses or refurbishing those from a dilapidated state, it’s clear that the need for quality housing on the UK market is still very much present.

On the other hand, the usage of bridging loans for auction purchases has seen the biggest drop — down to 7% up from 20% just in Q1 2018. Perhaps people aren’t feeling too adventurous about purchasing auctioned properties when prices have fallen across the board and the uncertainty of Brexit is still hanging around, at least for one year more.

Where is the UK bridging finance market heading?

Despite respondents’ predictions in EY’s first study of the market in 2017, growth in the bridging loans industry has continued at a slow but steady pace.

Although we can’t compare this rate to the one we saw right after 2013, Mintel Forecasts is still optimistic that 2018 and 2019 will see growth, even if it’s at half the rate it was back then. This said, the biggest increase can already be seen in the commercial and development markets.

Another prediction that Oxford Economics had for 2017 and – has now been surpassed, was that growth would fall flat or even become negative for the year right after the referendum.

However as the Bridging Trends infographic shows, this prediction was unfounded, as total gross lending has been £197.94M in Q2, an increase of £43.9 million on Q1 2018.

Challenges still present, outlook optimistic

Without a doubt, economic uncertainty influences both borrower and lender behavior. Another factor that comes into play is the borrowers’ perception of the bridging finance market – or how trustworthy lenders appear to investors. Last minute regulatory changes can also cast a shadow on growth of the short-term loan market.

Yet despite all of this, we think that the fundamental need – that of quality housing and loans for investors to create that housing – will counterbalance any turbulence that might arise.

The same Mintel forecast from 2017 showed a CAGR (Compound Annual Growth Rate) of 11% for the 2018 – 2022 period.

With all of this in mind, there has never been a better time to opt for a bridging loan. There’s more lenders now than ever which means that we are compelled to offer borrowers the best terms and rates that we can. Why not take a minute to enquire to see if our bridging loans are for you?

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