In a recent article in Mortgage Solutions,the Intermediary Mortgage Lenders Association (IMLA) it warned lenders not to be tempted into taking on riskier cases. It was, of course, talking about mainstream lenders and the move towards higher LTVs and areas like later life lending.
It got me thinking about the differences between the mainstream market and the specialist bridging market however.
While mainstream lenders are all about avoiding risk wherever possible, bridging is about providing a specialist service by managing the risk. Of course, bridging lenders with the lowest rates will still be about volume over risk; a more automated approach can help keep costs down but allows for less flexibility.
More bespoke bridging lenders on the other hand focus on underwriting every case on an individual basis. Typical of much of the specialist market, this enables a lender to look at every case on its own merits, no matter how unusual.
This level of underwriting and due diligence can be just about the property or as much about the borrower. Sometimes it’s possible to lend on what may appear to be a more risky case because the borrower, often a developer, has a track record of successfully delivering such projects – or sometimes just because the lender has a successful track record with the borrower where any loan has always been repaid.
Just because something is outside of the usual parameters does not mean that it is automatically more risky therefore; much of it depends on the business case – and this is where good bridging lenders come into their own.
It is the same with LTVs, while the usual bridging LTV is 75% or below, for a redevelopment where the property value will rise significantly on completion, the starting LTV can be less important as the completed project will have an LTV which is significantly lower than the norm.
This is not about throwing caution to the wind, it’s about using experience, track record and due diligence to make an educated judgement.
It is also about pricing for risk. Another advantage that a specialist bridging lender has is that it may take on, what is perceived to be a more risky project, but flexible interest rates mean that the borrower receives their funds but perhaps at a slightly higher rate. Within a portfolio of other loans where the rest are more conservative, this is a decision that knowledgeable bridging lenders can take on a case by case basis.
This is of course a very different scenario to the mainstream market and both areas play an important role, with bridging increasingly growing in significance. Of course, no lender wants to grant loans that will not be repaid so much comes down to a responsible level of due diligence, but much is about using experience to manage risk rather than avoid it and taking a case-by-case approach to provide a level of service that just cannot be provided by more automated lenders.