“We have experienced an enviable phenomenon in the UK of ever increasing property prices exceeding inflation over 30 years.
“But there are occasionally short, sharp shocks to the market and the availability of bridging finance from traditional lenders as we have experienced in the last five years.
“The Mortgage Market Review has therefore stipulated a more rigorous assessment of affordability for bridging loans where it can be demonstrated and clearly understood that there is the ability not only to service interest, but to repay capital borrowed.
“There has to be a credible and robust source of repayment of capital borrowed without recourse to a longer term mortgage with another institution, which may not be available to the customer when the bridging term ends - this responsibility is to be shared by the broker as well as the lender.
“My view is that the Financial Services Authority is not so much cracking down on this market but applying good common sense to people entering into arrangements that they cannot realistically see their way to fulfil if the market turns against them, jeopardising the property asset that they are pledging as security if they cannot service interest (if rates escalate), or sell.
“The typical private banking client however often has other sources of wealth, most probably assets under management or perhaps a family legacy that they can turn to as an alternative means of repayment of capital which enables that client to demonstrate the ability to repay a typical bridging loan.
“Typically the bridge may be prompted by a customer’s desire to downsize from a property as their children have married and can support themselves - private banks are well placed to support such a move.
“The most obvious pitfall is the fact that their application will not be successful because of the aforementioned reasons; that they cannot show a believable means of repayment besides re-mortgaging.
“Therefore inevitably a number a people with more modest means will be excluded from this type of borrowing.
“In addition it should be understood that the need to sell equities and other types of investment at short notice may give rise to CGT consequences or penalties - let alone the current market level.
“There is also a trend that people are looking to property as a panacea for yield as deposit rates are low and they perceive property development as an easy way to accumulate capital.
“However my view is that this has created a property bubble in London, particularly in properties valued over £2m.
“Property development needs experience and skills such as submitting planning applications, architect’s plans, building, interior design, marketing, and a contingency for the unknown factored in to the project.
“Relying on third parties to do this work for you is more costly and you always run the risk that a building firm may become insolvent part way through a development, causing costly delays and more than likely an incremental cost for another firm to finish the work.
“Putting a property on the market in the right area, at the right price, at the right time of year can be a lottery and could give rise to losses if the project has not been well thought through.
“For short-term bridging facilities, the interest rate is only one factor to consider – because the loan is only required for a few months and so it is not the greatest proportion of all the costs the individual will incur when undertaking a property transaction (e.g. legal fees, stamp duty, refurbishment).
“People will often approach private banks for a more personal assessment of the situation and fast turnaround, as we have the discretion to make a decision quickly.
“We have many examples of helping our clients, often only taking 10 days from initial enquiry to property completion.
“This is often more important to clients than the headline rate as they don’t want to lose the home of their dreams.”
