12 months ago we started to see some level of normality return to the housing market. Restrictions on estate agencies, home viewings and new-build sales eased and government support and the Bank of England interest rates certainly kick-started the market. However, many high street lenders, a consumer’s ‘go to’ for first charges, were still struggling with the new ‘work from home’ environment. These larger lenders failed to adapt quickly enough and customer service levels dropped, with a slowdown in the turnaround for mortgage approvals. A deep-dive into the Land Registry showed that, as of March this year, the total time to sell – from the initial listing of a property to the sale being recorded by the Land Registry as complete – is now an average of 295 days compared with 240 days pre-pandemic – meaning any additional delays to lending approval exacerbate the situation further. We’re still seeing tighter lending criteria and although lenders are relaunching products on a seemingly daily basis, the reduction in product availability, overall economic uncertainty and the end of various government and regulatory support continue to make the lives of people looking for property lending far harder than they should be.
Clearly then, borrowers need professional help. The role of the mortgage adviser is key to securing lending in this more complex, more credit risk averse world. With a reported 375,000 property sales put on hold as the effect of the pandemic struck in March 2020, it’s no surprise that many property owners looked to alternative borrowing sources to either renovate the home that was suddenly too small for home-working or to renovate properties in a commercial portfolio.
This is where second-charge lenders have come to the fore over the last 12-18 months. These specialised lenders are often smaller and, therefore more agile than their high-street 1st charge counterparts and their speed and readiness to adapt to a ‘new normal’ led to a reported 176% increase in business year on year.
A second-charge option makes so much more sense as a borrowing option when considering how challenging the high-street 1st charge lenders’ processes have become. Even product transfers are not without challenges given everything that the pandemic has brought!
What about bridging? Advisers don’t normally recommend a bridge loan to their clients without a clear exit route. This means evaluating the options that are available to refinance if the client’s circumstances remain within lenders’ criteria, and/or the selling of the property within the given timescale.
A typical bridge will be arranged for between 3-12 months. If the client takes a shorter term, their exit route will need to be very robust, if they take a longer term, unless they can service the interest, it will affect the net borrowing amount. There are a range of things that could go wrong with someone’s exit route between the 3-12 months in a normal world but in a pandemic… It’s been interesting!
A client’s circumstances may change, e.g. they could lose their job or have a credit issue and no longer qualify for the planned re-mortgage. If they are exiting through the sale of the property, there is the risk of the sale falling through at any time.
Here are 2 pre-covid cases where circumstances out of the client’s control caused them to default.
The first was a semi-commercial refinance. The new lender's mortgage offer was issued 3 months into a 6-month term, so there should have been sufficient time for the refinance to happen. Unfortunately, the commercial lender's solicitor had a problem with the lease agreement that had been issued to the tenant (who leased the warehouse in the back yard for just £1000 per year!).
The lease was rolling over, and the client’s solicitor believed it was valid, however the lender’s solicitor, after many delays and arguments back and forth, insisted that the lease should be rewritten, and that the tenant sign in front of their own solicitor to confirm they understood they were forfeiting the existing lease benefits when entering into the new one.
Legal correspondence between the solicitors led to more confusion with the client believing the matter had been settled, when it hadn’t. The client was charged 1.99% a month default interest for 2 full months, even though he completed after 5 weeks, as the policy was to charge monthly interest not daily. Also, he was charged around £3000 in ‘other fees’.
The second case related to clients refurbishing a property. They had paid their builder the money to complete the work and for materials in advance, but unfortunately, their builder's partner suffered a serious illness and the work was considerably delayed.
Their existing lender refused to renew the bridge as there was not enough equity to cover further bridge payments.
Can you imagine the impact that the pandemic restrictions would have had on these cases? Would the lenders have renewed the bridge and at what cost if the clients were unable to sell the properties? As many things can go wrong, it’s important that advisers look at both the headline rate and terms of a bridge lender but also the lender's policy if things go wrong. Will they give the client a grace period? Will they charge a higher default interest rate? What will the conditions be around extending the loan if the client can’t afford to service additional payments? How quickly will the lender move to court proceedings?
It's also worth understanding which lenders in the market are willing to re-bridge a client away from the initial bridging lender if needed.
We were able to give the second client an option by structuring a re-bridge that involved the refinance of the first charge and then a simultaneous second charge bridge to service payments of the first charge while the property was being sold to avoid repossession by the original bridger.
So there are options available, but advisers should make sure that clients are fully aware of the risks and consider these risks and the range of options in advance of entering the bridge contract.
1. What do you think are a bridging adviser’s core responsibilities? (Both before, during and after the loan)
Acting in the best interest of the client throughout the whole process.
Before the loan it’s the adviser’s responsibility to explain to the client why a bridging loan is appropriate for their circumstances. It is then to find the best possible deal for the client, not only by cost but also security; reliability of funding from the lender; lender service; flexibility and turnaround times; serviceability and more.
To secure the best possible deal, there can be an element of negotiation with the lender, undertaken by the adviser on behalf of the clients.
It’s also important for the adviser to establish at the outset, how the client plans to exit the bridge i.e. refinance or sale of the property, to ensure this is realistic and then position it with the lender and, if possible, have a backup exit plan.
During the loan application process, an adviser needs to be pushing for the valuation, legal works and underwriting to be carried out in the shortest possible time, in order to hit set deadlines in order for the case to complete on time. This means actively managing the case right through to completion rather than leaving it to the lender.
After the loan has completed, an adviser should maintain contact with the client throughout the term of the loan to make sure they are on track to exit the bridge on time. If the client is planning to refinance the property to exit the bridge many advisers will also be involved in setting up the long-term finance. It’s far better to be proactive during the term rather than reacting late on in the timeframe at which point the client may be in danger of paying default fees.
What questions should every adviser ask a bridging lender?
- How are they funded?
- Are they regulated or non-regulated?
- Do they deal with both regulated and non-regulated advisers?
- How quickly they typically complete a loan – ask for case studies of completions to back this up
- What their underwriting process is, what their requirements are, whether you get to speak to an underwriter or decision maker directly.
- How flexible they are with their underwriting if it is a more complex case
- What happens if the bridge does not exit in time, in terms of default or extension costs and how will they treat the client?
2. If the right level of work, care and responsibility is not undertaken by an adviser, what impact will this have on the adviser, client, and lender?
If the right level of diligence is not undertaken there is the risk that the client will really lose out. Then they may not be able to progress the project (whatever that may be) or the project may be delayed, thereby incurring costs, as well as loss of time which may have its own cost implications. Any delays could mean the client may not be able to exit on time -again incurring additional costs. It may also impact on their credit record and therefore, future projects, if the client defaults on their bridging loan.
The lender may end up with cases that do not exit on time which may impact on their own funding. Any case that does not progress to completion is wasted time and a cost to the lender. These costs for aborted can become substantive which could in turn affect pricing.
The adviser could lose credibility with the lender which may impact on that lender/adviser relationship. This could then affect other cases as lenders like to use experienced bridging advisers that get cases over the line. If the adviser places the borrower with a lender that doesn’t deliver, then it could also damage their relationship with the client and could result in them losing a client that could have become a long-term source of income.
3. Regarding adviser commission, what level of work, in your opinion, equates to getting paid?
Being an adviser means being actively involved throughout the whole process before, during and after the loan completes, and not being a “post box” merely passing information to and from but always acting in the client’s best interest. If that is done competently, the lender receives all the information they need to make an informed decision promptly, the borrower receives the funds they need on time, then the adviser should then be paid in full.
4. Advisers have significant control on making positive change within the bridging market. They can influence their client’s options and the standards to which lenders are held. But can more be done?
Of course, we can always improve; our market is constantly evolving. The day we stop looking to improve, either in our own businesses or the market, is a time to stop being in the industry.
For example, whether there should be a formal qualification for advisers to be able to advise clients on bridging finance is something that has been discussed for some time. However, even without that, we can self-improve; at Connect for Intermediaries, for example, we have developed our own Learning Management System for our network members which has a bridging finance module amongst others. This means advisers who are part of our network can improve their skills and knowledge and truly understand bridging, as well as a lot of other areas of the market, with the support to become the best adviser they possibly can be.
A lot of the delays in the process can be at the legal stage, particularly if the client is using a solicitor who is not familiar with bridging or the requirements of that particular bridging lender. Having an impartial panel of solicitors who have acted for previous bridging clients and who lenders would rate is a great help. It assists advisers in leading clients towards using an expert bridging solicitor which may save them time and money in the long term.
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