The Bank of England’s decision to crack down on buy-to-let lending through the introduction of tighter borrowing rules and stricter affordability tests mean that increasing numbers of landlords are turning to less conventional forms of finance in order to carry on investing in the buy-to-let market.
According to the findings of a new ‘broker sentiment survey’, conducted by bridging loan lender MTF, 84% of brokers were unable to source a buy-to-let mortgage for some of their clients in the final quarter of last year, with more than a quarter – 27% – attributing affordability as the main barrier.
One in five of the brokers surveyed said they were unable to get buy-to-let mortgages for clients with adverse credit and equally, 20% blamed consumer buy-to-let regulations.
But while buy-to-let lenders deal with the latest interventions by the Prudential Regulation Authority, business in one often-overlooked corner of the market is currently booming.
Demand for bridging loans – short-term secured loans designed to bridge a temporary cash shortfall when acquiring a property – has surged, as reflected by this latest poll.
The study found that 69% of brokers opted for bridging finance after being unable to raise a buy-to-let mortgage for their clients in instances where time is of the essence. Some 8% of brokers opted for secured loans as an alternative.
Bridging loans were once perceived as a ‘last resort’ lending option. But with a growing number of borrowers attracted to the greater flexibility offered by alternative finance providers, including no minimum term and no exit fees, it is now expanding fast, with 31% of brokers noticing a rise in bridging loan volume in Q4 2016, up from 13% in the previous quarter.
The South East saw the biggest demand for bridging loans in the UK at 50%, up from 29% in Q3.
The main reason borrowers took out a bridging loan in the fourth quarter was to refurbish a property at 31%, followed by development projects at 15%, highlighting how bridging loans are being used to increase rental income, due to the interest cover ratio increasing from 125% to 145%.
Bridging, known for its speed, offers much faster time to completion than high-street lenders, and so it follows that short-term finance is easily outpacing the mainstream mortgage market, with three-quarters of brokers experienced a rise in overall bridging loan volumes in 2016 compared to 2015, and 69% expecting a further rise in 2017.
None of the respondents expect bridging loan volumes to decrease in 2017, showing its growing prominence as a loan product.
Tomer Aboody, director of MTF, commented: “The results from our Q4 survey reflect the adverse impact of stricter affordability and stress testing from mainstream lenders on professional property investors’ ability to obtain buy to let mortgages.
“Despite uncertainty in the wider markets, we expect strong demand for bridging loans to continue in 2017.”
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