There has been a lot of speculation in the past few months about exactly when interest rates will start to rise and by how much.
I’ve heard Robert Sinclair, chief executive of the Association of Mortgage Intermediaries, predict that the Bank of England will raise rates twice in 2015, bringing them up to 1%. Savills researchers meanwhile have suggested that the base rate will rise to 2.5% by 2017.
For those of us operating in the bridging market the base rate has a much less defined link to the cost of finance for consumers.
It’s relevant, but we don’t set rates in relation to it in the same way that mainstream lenders do. Bridging rates are much more reflective of investor appetite for yield.
But there are nevertheless some potential implications for the bridging market of a rising base rate.
HSBC has estimated in the past that there are around 4.4 million UK mortgage borrowers sitting on their lenders’ standard variable rate.
While the base rate has remained at 0.5%, the proportion of those borrowers who have high loan to values, negative equity or poor affordability have been able to scrape by, making monthly repayments.
But as the base rate rises, their SVR rate is likely to rise in line. This could start to tip some borrowers over the edge of what they can afford, resulting in late or missed mortgage payments and potentially rising repossessions.
None of this is news – it’s the well-documented reason that Bank governor Mark Carney has been so careful to say that when rates do start to go up, the rises will be slow and small.
He clearly intends to take the softly softly approach so that the Bank can guard against too much wider economic fallout from the inevitable payment shocks borrowers are facing.
Why is any of this relevant for the bridging market?
Earlier this month the Financial Conduct Authority spoke at the Association of Short Term Lenders’ annual conference. Lynda Blackwell, manager of mortgage policy at the regulator, warned the bridging industry that it was concerned about how rapidly the volume of gross bridging lending was apparently rising.
She suggested that anecdotal evidence pointed to a big bump in bridging lending since April this year – the month that tighter regulation was brought into the mainstream market in the form of the Mortgage Market Review.
Her fear, she said, was that borrowers finding themselves shut out in the cold by mortgage lenders whose new affordability rules denied them a loan were turning to bridging lenders outside the net of regulation in a bid to repair their credit by consolidating debts into one short-term loan with no interest payments monthly.
I have a couple of views on this. Firstly I think so-called industry-wide reports on the volume, value and growth rates of bridging are not, and cannot claim to be industry-wide.
There is very little data available across the industry – there’s no onus on lenders to provide it and frankly, many don’t want to share that kind of insight with their competitors, even through the relative safety of the ASTL.
I suspect that the numbers are skewed by the success of the lenders who do report their figures. In short, I don’t think bridging is booming quite as dramatically as many in the industry have said it is.
Indeed, that view is shared by Brightstar boss and Association of Bridging Professionals chairman Rob Jupp. His response to Ms Blackwell was that his firm had not seen any noticeable growth in the number of borrowers seeking bridging finance since MMR came into force. He should know.
Secondly, and it really has to keep coming back to this point, there’s more than one kind of bridging. When we talk about bridging we are talking about lending money to property investors who develop property for a living. It’s their business.
These are not consumers struggling to meet their mortgage payments – they’re usually the opposite of that.
They choose to deal with bridging lenders to fund developments because the big banks which used to do a lot of this lending pre-Credit Crisis have not yet got back in the game and because even when they have, they take forever to approve the loan.
Properties don’t sit on the market for six months waiting for a bank to push paper around. The additional cost of taking bridging finance at a higher rate is also pretty negligible because they’re not taking it for longer than six months. Bridging finance is the difference between doing the deal and not doing it.
There is a real danger that we in the bridging industry are not being clear enough about this distinction. It matters a great deal – growth in lending to professionals is a positive thing, both for our industry and for the broader economy. Growth in lending to borrowers who cannot afford it is clearly not in anyone’s interests.
While I don’t think that Ms Blackwell’s fears of a bridging black hole into which poor unsuspecting consumers are being led are completely unfounded, I do think they are overblown.
That said, her views should serve as a reminder that it is in everyone’s interests that the bridging industry stays alert to the potential for this type of behaviour, particularly as we come ever closer to the time when the number of borrowers willing or forced to take that risk starts to grow in line with rate rises.
