Prior to the 2007 credit crunch, credit was easy to obtain and bridging finance was a very last resort due to its high interest rates. Mainstream lenders typically backed away from providing it as those who needed a bridging loan tended to be deemed riskier.
The risk of bridging finance lies within the exit strategy and speed of the transaction, as the exit strategy will either be refinance or sale of a property and a lender will want to know if you can actually get the refinance or sell the property in time. Furthermore, the fast nature of these loans means there are fewer checks and the security is likely to be based on assets.
As a result of this perceived risk, interest rates were very high to protect the lender – they could have been anywhere from 12 per cent to 20 per cent a year.
Historically, apart from a number of specialist lenders, the market was very small. The reason being was that you did not really need bridging finance because mortgages were easier to come by – ironically, the availability of property finance was a major factor of the crash. Banks were lending on income ratios of seven times a person’s income. Northern Rock was giving out loans for the deposit, and a mortgage on top of this – effectively, mortgages for 100 per cent of a property’s value. There was also the dangers of self-certification mortgages, enabling someone to assess their own affordability.
In the early 2000s, it was easy for developers to obtain credit from their bank for development because it was all about getting money into property – it was an era of easy credit.
However, following the collapse of the property market, which, at its worst dropped in value by 40 per cent, many short-term lenders would only lend net 60 per cent of the loan to its value. We are now starting to see the loan to value rise to around 70/75 per cent.
The credit crunch restricted the flow of credit because all of the main lenders pulled back from property lending as a whole for fear of another crash. The two major pressures in the market were banks recapitalising – and from a regulatory point of view, having to increase their capital percentage. As defaults started to rise, banks needed to hold more capital and reduce the bad loans on their loan books.
Legacy issues from the crash meant that, from a compliance perspective, self-certification went out of the window. More stringent affordability checks were put in place and income ratios were capped at four times income.
