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RATES MUST NOT DROP TOO LOW

By Kit Thompson

There has been a flurry of activity in the bridging sector recently as lenders in both the regulated and non-regulated space re-price their products downwards. This has resulted in the cheapest bridging rates the sector has ever seen.

Aldermore dropped its headline rate to 0.64 per cent a month via its exclusive panel of bridging distributors and, at the time of writing, is still offering £500 towards the valuation cost. Incentives such as free valuations or legal fees are something that traditionally have been seen only in the mainstream mortgage market, so this is a sure-fire sign that bridging lenders are having to do more to attract business.

Precise was quick to react to the drop in Aldermore’s rates, with further reductions of its own. Pricing now starts from just 0.59 per cent a month. There were rate reductions across Precise’s bridging range at all LTVs, the largest of which was in its 70 to 75 per cent LTV products, with rates coming in at sub-1 per cent.

Shawbrook launch

Meanwhile, Shawbrook Bank launched its regulated bridging range earlier this month in one of the most highly anticipated product launches of the year.

Rates start from 0.59 per cent and it boasts features such as no minimum term and no minimum interest rate charges. Again, the products offer the biggest savings at the higher-LTV tiers, with rates at just 0.69 per cent a month at 70 per cent LTV.

The last time the bridging sector saw pricing competition like this was in October 2013 when UTB became the first lender to drop rates to 0.69 per cent. This was followed just a few days later by Precise, which dropped its headline rate to 0.65 per cent. Since then there has been little movement in either bridging rates or criteria, so we are long overdue a shake-up.

There is little doubt the market will take a few weeks to settle following Shawbrook’s launch into regulated bridging. The existing lenders in this space are then likely to take stock and see how hard they have been hit. I expect this will then lead to further re-pricing.

I am all for cheap bridging rates and healthy competition is generally good news for borrowers. However, bridging lenders must be careful not to drop rates too low. There needs to remain a premium for short-term finance when compared to longer-term finance and lenders obviously need to continue to price for risk.

Bridging rates at 7 per cent a year are getting dangerously close to the upper range of some mainstream mortgage products. For this reason, I believe there is a limit to how low bridging rates can, and indeed should, drop.

There has to be a clear margin of increased rate for increased risk. Lenders with a range of products, including long-term mortgages, buy-to-let, second charge mortgage background: rgb(255,255,255); /* Old browsers */ background: -moz-linear-gradient(left, rgba(255,255,255,1) 0%, rgba(255,255,255,1) 12%, rgba(255,255,255,1) 15%, rgba(109,0,25,1) 74%, rgba(109,0,25,1) 86%, rgba(109,0,25,1) 96%); /* FF3.6-15 */ background: -webkit-linear-gradient(left, rgba(255,255,255,1) 0%,rgba(255,255,255,1) 12%,rgba(255,255,255,1) 15%,rgba(109,0,25,1) 74%,rgba(109,0,25,1) 86%,rgba(109,0,25,1) 96%); /* Chrome10-25,Safari5.1-6 */ background: linear-gradient(to right, rgba(255,255,255,1) 0%,rgba(255,255,255,1) 12%,rgba(255,255,255,1) 15%,rgba(109,0,2slides, commercial and bridging finance, are best placed to be able to drop bridging rates further because they can balance their cost of funds and risk across the different sectors.

One thing is certain: while UK property assets remain appealing to investors, there will continue to be an ever-increasing demand for short-term property finance.

More innovation

While I believe rates can drop further as time passes and as we see the impact of the MCD, lenders will need to offer more to attract business. So we should expect further innovation around LTVs and tweaks to lending criteria, particularly in regulated bridging.

Meanwhile, unregulated bridging firms will continue to compete in areas where rates are not always the driving factor.

Many non-regulated lenders offer funding for niche areas, such as non-standard or unusual property types, land and business loans to limited companies, which generally are less rate sensitive.

The recent securitisation of £100m of bridging assets by Amicus (owned by Omni Partners) shows there is a viable longer-term market for these short-term loan books as well, so watch this space.

Kit Thompson is director of bridging and development finance at Brightstar.