Major banks and building societies have retreated from the mainstream mortgage market, leaving borrowers scrambling to obtain the finance they need.

First-time buyers have seen their options dwindle to almost nothing as lenders have shied away from offering what they perceive as riskier small-deposit loans. The self-employed, workers who have been furloughed and even buy-to-let landlords have also found it more difficult to take out loans.

The mortgage market, buoyed by the stamp duty tax giveaway but tempered by backlogs in the housebuying process, is frantic and fractured in equal measure. But this has allowed other parts of the market to step in and fill the gap, with the bridging sector taking particular advantage as borrowers look for alternative ways to fund their property purchases.

Bridging activity rose by 46 per cent in July to September, compared to the previous three months, according to lender MT Finance. Although lower than pre-coronavirus levels, lending hit £116m during the quarter thanks to an influx of customers who would normally have taken out loans at high-street banks.

And, in sharp contrast with their mainstream rivals, lenders in the sector are increasing their maximum loan-to-value ratios and loan sizes, broadening their appeal.

Connect for Intermediaries chief executive Liz Syms says slow service from mainstream lenders has persuaded many people to turn to bridging to secure the finance they need.

“Many lenders are taking longer to process applications,” she says.

“Bridging, traditionally used when speed is required, could be considered. However, there are increased costs that need to be taken into account.”

Moving mainstream

A common criticism of bridging has been its high interest rates. The nature of the product means interest charges are compounded and this can cause overall funding costs to spiral if the borrower is unable to refinance quickly.

However, rates have been falling, according to MT Finance’s industry data. It found that the average rate had fallen to 0.78 per cent after peaking at 0.85 per cent during the spring.

This has made it easier for mainstream borrowers to use the product for the first time if they have been blocked from taking out a loan by high-street firms or have struggled to get their approval completed in time.

Hope Capital chief executive Jonathan Sealey says: “In the current climate whereby the mainstream market has tightened criteria and is starting to experience backlogs in conveyancing and valuations, bridging loans are now very much a product of first choice.”

As the demands from bridging customers have changed, the types of loan being offered by bridgers have also shifted. MT Finance’s research suggests that the average LTV has increased from 48.8 per cent to 51.7 per cent thanks to the influx of mainstream borrowers unable to access finance elsewhere.

This market shift has also caused lenders to revamp their propositions. Both Roma Finance and Precise Mortgages have raised their maximum LTVs and loan sizes in response to the increased customer demand.

Glenhawk has launched its first regulated product, adding to its range of unregulated loans, after seeing a surge in enquiries from borrowers looking for a regulated deal.

Regulated loans, which come under the auspices of the Financial Conduct Authority, are typically used by people who plan to live in the property, while unregulated loans are intended for businesses.

MT Finance director Joshua Elash says the growth in residential users makes it even more important for lenders to ensure that customers have a viable strategy for repayment.

“We need to be ever aware of the world around us,” he says. “A significant percentage of the exit strategies for our loans will be directly and/or indirectly reliant on mainstream funding in due course.”

Syms says clients must be confident that they can refinance the property back to a mainstream lender or the bridging costs will likely be prohibitive.

“Some-term lenders will not allow a remortgage until a property has been owned for at least six months, restricting choice or increasing cost,” she says.

“So while, on the face of it, it looks like a good idea, there are a lot of costs to factor in to make sure it is worth it.”

Elash adds: “A lender should not be offering high-LTV bridging loans in the hope that higher-LTV mortgages are just around the corner. This is not healthy, and really not what bridging finance should be used for.”

Time to act

BTL landlords face a race against time to beat the stamp duty tax deadline. While investors will still be required to pay some property tax, they are currently charged a much lower rate than usual, boosting activity in the sector. Landlords are already concerned that they may not be able to purchase before the 31 March deadline, but bridging can offer them a lifeline.

Sealey says Hope Capital is now receiving 70 per cent of its new business from landlords, compared to 60 per cent before the pandemic began.

“The majority are using bridging loans to purchase and refurbish a property with the intention of then refinancing onto a BTL mortgage at the end of the bridging loan period,” he says.

“The number converting from a bridging loan to a long-term BTL mortgage has increased from circa 65 per cent before lockdown to over 80 per cent now.”

In a fast-moving market, bridging has offered buyers the chance to act decisively and fend off rival purchasers. The use of bridging finance to purchase properties at auction has also increased since the start of the summer, Sealey adds.

Elash says he has seen strong demand from landlords who are adding value to their existing portfolio. This has included converting properties into houses of multiple occupation, reconfiguring homes to add bedrooms or undertaking heavy refurbishments.

“In these instances, the property professionals want to keep their costs down and thus don’t seek out maximum leverage. They borrow what they need to complete their goal,” he adds.

Beating the deadline

As the stamp duty deadline approaches, the property market frenzy is expected to reach fever pitch. Investors who need to secure a property purchase quickly will become more reliant on bridging finance to complete before the tax break is withdrawn, Sealey believes.

“It is highly likely that we will start to see even more people using bridging loans in order to buy the properties they want quickly and take advantage of the stamp duty holiday,” he says.

“This demand will increase while mainstream lenders are unable to meet the needs of borrowers in the timeframes they require, particularly for higher-value properties where the savings could be up to £15,000.”

Sealey thinks many borrowers will use bridging finance with the intention of remortgaging to a mainstream mortgage once they have secured the property.

However, Syms says buyers should ensure that the costs of arranging the bridging finance do not outweigh the stamp duty tax savings.

“Often bridging loans come with an arrangement fee of 2 per cent, which on a £500,000 loan would be £10,000 of the £15,000 stamp duty savings,” she says.

“There would also be survey and legal costs to arrange the bridge, which are in addition to the survey and legal costs that would still be needed for the term loan. Finally, the monthly cost of the bridge is significantly higher than the term loan, again eating into the savings.”

Syms says would-be users should try to use lenders with lower arrangement fees and those that offer dual representation on cases. This is where the same solicitor acts on behalf of both borrower and lender.

“What would be more ideal, of course, is if the deadline was extended,” she adds.

Speed of service

The rise in the popularity of bridging has largely been thanks to slow service at mainstream lenders, but there are concerns that the short-term sector could suffer a similar fate.

Mainstream banks have seen processing times increase, but delays to the surveying process have also started to affect the normally speedy bridging sector. Average bridging completion times have risen to 52 days, according to MT Finance; two days longer than their pre-summer levels.

Despite this rise, Elash believes the sector has the ability to cope with the increased demand.

“With significant pent-up demand resulting in a large and sudden influx of applications, the biggest challenge facing the mainstream mortgage market does not relate to either liquidity or LTVs, but instead to capacity,” he says.

“This is where specialist finance lenders can really assist by providing funding much more swiftly in instances where this is needed.”