It appears that there is a rise in the number of applications for re-bridging. This could well be reflected in the ASTL’s recent figures as, while the value of applications in the second quarter of this year rose 5.3% compared to the same period in 2018, completions dropped. This means that either lenders are lending for a longer term or borrowers cannot get out of their bridging loans.
If the figures are correct then the drop in completions will mean that some lenders’ loan books will be down. This is bound to be a worry for the lenders in this situation but it will be a greater worry still if a significant proportion of the loans still on that lender’s books are ones that have been re-bridged.
Re-bridging, it appears, may well be propping up the market with many figures of completions actually consisting of a re-bridge rather than a new loan. The problem is that this is a risky game of pass the bridging loan where sooner or later the music will stop and the lender left holding the loan may well get burned.
Each time a loan is re-bridged of course the fees go up – both to exit the old loan and to take out the new one. If interest has been rolled up during the first loan or loans then inevitably the size of loan is getting larger, as is the LTV, assuming the property value stays the same.
The challenge is that, with growing competition, the temptation to raise LTVs to win (or buy) business is just too much for some lenders. But if the loan is for a development which subsequently doesn’t go to plan, or the borrower cannot sell or refinance in the way they thought they were going to, they could well find themselves out of time and out of luck. Especially if they cannot then re-bridge their loan to another lender. The situation for the borrower gets worse still if their existing lender will not then extend their loan because the high LTV combined with rolled up interest means it is also not affordable for the lender to keep the loan on their books.
In this situation – or with any loan that has been rebridged multiple times, ultimately the lender will need to repossess and hope that there is enough equity left in the property to cover their loan, their costs and any interest due. Hardly an ideal situation for any lender.
It is frequently the case that borrowers overestimate their powers to deliver a redevelopment in the time they have allowed themselves. Borrowers of course also often consider their property or development to be worth more than it actually is. While it makes sense for a lender to extend the term on a sensible development that has over-run through unforeseen circumstances to continually extend or rebridge ultimately threatens not only the livelihood of the borrower but that of the lender themselves.
Sensible underwriting and a clear exit route should underpin every lenders’ loan book, but the ASTL’s Q2 figures indicate that for some lenders this could be far from the case. The question is when will the music stop and who will fall over when it does?