Will coronavirus impact bridging interest trends?

While serviced bridging loans aren’t anywhere near as popular as their more t r a d i t i o n a l counterparts, there is interest in them, so to speak. In light of the coronavirus pandemic, might lenders favour the relative control of receiving regular monthly payments? Or, does the need for income assessment and the risk of payments being missed by cash-strapped borrowers amount to lenders having less of a handle on their portfolios? For borrowers, the need for access to higher net loan amounts upfront through a serviced bridging loan may be a pressing requirement in order to continue with projects, considering the prevailing decrease in LTVs across the board.

During this unprecedented period of uncertainty, the government is calling on lenders to be more accommodating with borrowers. Following prime minister Boris Johnson’s lockdown edict on 23rd March, the FCA emphasised the need for lenders to treat customers fairly, while also reminding borrowers that they will continue to be charged interest on what they owe. The regulator quickly announced a three-month payment holiday period for mortgages and regulated loans, which are proposed to be extended until October 2020.

Historically, serviced bridging loans have appealed mainly to borrowers with substantial alternative income sources, in addition to the asset(s) they are using as the security for the loan. They are probably less financially constrained compared with the typical asset-rich, cash-poor bridging customer. Expressing his personal view, rather than that of the Association of Short Term Lenders for whom he is CEO, Vic Jannels feels that, given the pre-coronavirus combination of liquidity, low rates and competition in the lending market, borrowers were more comfortable adding interest onto their debt, even though that, ultimately, makes it a larger sum to be repaid than if it was taken out on a serviced basis.

PROS AND CONS

This view is generally echoed by lenders. Pivot offers mainly retained and serviced interest, and asserts that its serviced offering is strongest for assets with underlying income, such as BTL, HMOs, let commercial offices and retail shops, as well as student accommodation. PakSan Wu, funding and portfolio manager at Pivot, doesn’t see much change in demand for the serviced option, but noted that some will be looking for the maximum drawdown from day one. “Sometimes, to accommodate that, we offer serviced interest instead of retained interest,” he says.

Oblix Capital reports that serviced loans have relatively limited appeal. “In one month, [we] may have half a dozen that want servicing, and the next month, [we] have none,” states Andy Reid, sales director for intermediary and network at Oblix. He thinks this is more down to the individual assets that need funding and the amount people are looking to borrow. “While we would be quite happy to transact that type of business, it is not the usual request.”

According to United Trust Bank, borrowers prefer interest to be rolled up because most requests for bridging relate to assets that aren’t currently generating income. Similarly, Aspen Bridging doesn’t see much demand for it. “Bridging loans are expensive, so you have to have high levels of income to service [them],” says Jack Coombs, director at Aspen. Referencing the impact of Covid-19, Jack considers the general strain on income is likely to result in serviced options becoming even less popular.

Funding 365 allows borrowers to repay part or all of their loan at any time during the loan period and adjusts the interest rate due accordingly. “We haven’t seen a rise in popularity of serviced loans. In fact, while it’s far too early to call this a trend, this year we’ve seen a dip in serviced and part-serviced loans. In 2018 and 2019, serviced and part-serviced loans accounted for approximately 25% of our bridging loans; in the first quarter of 2020 they accounted for only 15%,” says Mike Strange, director at §Funding 365.

This is due, in part, to the types of deals being completed by the lender. “We need to make sure that borrowers have the income to be able to do this—most commonly via property yield. Often, if a bridging loan is for refurbishment or development exit purposes, or for property purchases where the security is untenanted, retained interest is more appropriate,” Mike explains. In March, the lender reported a larger number of refurbishment projects and auction purchases, but noted that this could of course change throughout the year.

The firm says coronavirus hasn’t impacted its lending approach. “There’s been no change from us in that it’s the purpose of the loan that drives our decision [on] the method of interest payment rather than anything else,” adds Laura Kendall, marketing director at Funding 365.

MFS points out that receiving a higher net loan using the serviced model reduces the borrower’s initial deposit, potentially saving them money, depending on their circumstances. The company offers the option to service a loan after a minimum of three months until the end of the term. “Borrowers are now generally looking to obtain a higher net loan amount, therefore it may make sense for them to service the payments to facilitate that,” says Ian Miller-Hawes, head of sales at MFS.

But, in the current climate of lockdown and social distancing, such a desire from borrowers may be hard to fulfil. Dale Jannels, managing director at Impact Specialist Finance, observes: “With fewer servicing options available currently, the old mantra of ‘cash is king’ applies and the customer’s ability to service the loan reduces when cash is scarce.”

AFFORDABILTY CHECKS

One of the potential drawbacks of serviced loans highlighted by brokers and lenders is that they require greater scrutiny to ensure borrowers will be able to maintain monthly interest payments. “…The customer would have to demonstrate affordability more or less in line with what they would have to do if they were taking a high street mortgage . . . all of their living costs, utility bills, pensions, you name it, would have to be taken into account before a lender [decides] whether the customer has the ability to meet [a serviced loan],” says Vic.

Chris Oatway, director at LDNfinance, notes that the only time it will really look at serviced interest is when an individual either has income from a development site which will be able to cover it, or they are really pushing for maximum leverage, but can show that they have sufficient income to cover the interest on a monthly basis.

Broker Coreco reports a small rise in borrowers who require serviced loans in order to access more cash upfront—but its relatively minor appeal has more to do with lenders not wanting to “operate an element of affordability”. “It’s the larger, more established lenders who have the staff and capability to spend time assessing borrower affordability,” says Guy Nyirenda, mortgage broker at Coreco. “Smaller lenders aren’t really doing it; they just don’t have that capacity.”

Crystal Specialist Finance doesn’t expect too much of a change in favour of serviced loans, either. “There aren’t that many borrowers in need of bridging that can afford the payments . . . [it can be] a big chunk of your disposable income,” says Kris Corns, Crystal’s operations director,

for whom the option makes up a “pretty low” proportion of its business.

Of course, being able to carry out thorough affordability checks is a challenge in a locked-down scenario. “The assessment of the primary exit strategy, as well as viable alternatives, has become more difficult. For example, it’s much [harder] to know how long a property might take to sell, how long the refurbishment could take to be completed, and [whether] the potential refinance to exit the loan will be possible in six, nine or 12 months’ time,” says Dale.

Gavin Diamond, commercial director of bridging at United Trust Bank, agrees that these are the challenges all lenders face under the current circumstances. “A commonsense approach needs to be applied in making such assessments and decisions, taking the latest available information into account,” he comments.

Certain asset types that may attract the serviced interest model, such as tenanted properties, are easier to value in the absence of valuers being able to access them, claims Laura. “So, it’s likely that we will see more of these types of loans and . . . by default, serviced loans being completed in this environment,” she adds.

As the coronavirus situation plays out, Guy thinks that lenders can exert greater control when the interest is borrowed. However, given the status of certain exit plans, there may ultimately be a move towards servicing those that can’t be repaid. “That’s because most current and new loans are relying on an exit to repay the bridging loans, which will most probably be delayed now for an indeterminate timescale,” he explains. “Lenders are being pragmatic and extending facilities, where practical, in the short-term. However, this cannot last, so more servicing will be required moving forward.”

But just because a borrower agrees to pay interest monthly doesn’t necessarily mean lenders won’t lose money in the long run, notes Laura. “For example, if the property market crashes or a heavy refurbishment isn’t carried out as agreed. Plus, of course, many people may have issues paying monthly if the current social distancing measures last for much longer.”

CORONAVIRUS AFTERMATH

The cashflow pressure imposed by serviced loans could be too much for many at the moment. “Not many borrowers will have the financial strength to service their loans during these unprecedented times. Even if the borrower is able to provide financial evidence to support their case, I cannot imagine many lenders are willing to take on this risk…” thinks PakSan.

Lenders might decide to become more selective on what deals to take on. “Even if there is a demand in loans to be serviced, I cannot see lenders wanting to offer this unless the income from the asset or the personal income of the client is likely to be maintained during the [loan term] and can easily support the monthly payments. Demand may be higher, but I suspect most lenders are more likely to insist on retained interest,” Chris says.

One legacy of the coronavirus pandemic could be more varied ways of charging interest, like Aspen’s steppedinterest payments, which Jack describes as a “fundamentally different” way of structuring bridging finance. He illustrates that, on a 12-month loan, the charge may be 0.59% for the first six months, then 1.24% for the next six months. So, if a borrower redeems in seven months, the blended rate will be lower. “It’s a product that works best for a customer who is quick and efficient,” Jack adds.

LTV IMPACT

LDNfinance highlights a general fall in LTVs from 75% to 65% as lenders exercise caution in the current market. “Some lenders have such large loan books that their focus has moved solely to looking after their existing clients rather than securing new deals. This has meant there has been a surge in pressure on those lenders who are still in the market,” Chris says. “Where we previously could have had numerous lenders competing for deals, and we could request loans to be serviced to increase the net loan or negotiate on the interest rate, we are now finding there is a higher importance on deliverability.”

Even if the borrower is keen on servicing the interest, PakSan thinks the coronavirus pandemic creates huge uncertainty around their ability to do so. Nevertheless, there could be room for this option in a market where LTVs are lower. “We have seen, historically, that the lenders’ first reaction to a crisis is to reduce LTVs, or withdraw temporarily from the market. This will lead to a gap in LTVs, and servicing may reduce this. So, it is likely we will see an increase in demand for serviced loans in the short to mid term until LTVs recover,” suggests Guy.

Business was brisk last year for the bridging industry. The ASTL reported that bridging loan books grew to £4.5 billion INTEREST CHARGING ILLUSTRATION

Key Loan Details

Net Advance £1,000,000.00 Arrangement Fees 2% Interest Rate p.m. 1% Term (months) 12

Retained Interest

Gross Loan Arrangement Fees Total Interest Net Advance

£1,162,790.70 £23,255.81 £139,534.88 £ 1,000,000

Rolled up Interest

Gross Loan £ 1,152,805.23 Arrangement Fees £23,056.10 Total Interest £129,749.12 Net Advance £1,000,000

Serviced Interest

Gross Loan Arrangement Fees Total Interest Net Advance

£1,020,408.16 £20,408.16 £122,448.98 £1,000,000

Source: Pivot, based on a net advance of £1m

in 2019, an increase of 19.7% compared with 2018. The effect of a housing market impacted by social distancing measures will undoubtedly distort this upward trajectory. “…It is fair to assume that the value of properties will likely drop by at least 10-15% as demand falls in the next few months,” predicts PakSan.

Dale agrees that there’s a degree of nervousness about property values at the moment, and that some borrowers might have to offer more security if they still wish to obtain higher net loans. “However, sensible lending decisions should always be based on the borrower’s requirements and the plausibility of the exit strategy. That should never change in any market conditions,” he says.

If property values keep falling, lenders will probably continue along a path of precautionary LTV readjustments. As 2020 wears on, it remains to be seen whether the situation we are in will lead to more demand for serviced loans. No one can predict when normality will return but, as with many other areas of life, the industry may never be quite the same again.