Recent data has highlighted a shift in the bridging loan market, with conversion rates—the percentage of loan applications that result in successful funding—experiencing a dip.
Data from the Association of Short-Term Lenders (ASTL) shows a decrease in bridging loan conversions from 16% in the second quarter (Q2) of 2022 to 14.10% in Q2 of 2023, with a previous peak of 17.7% in Q3 of 2022. While these figures may vary across the 42-member lenders of the ASTL, they provide a window into the larger trends at play. BridgingandCommercial looked into the trend.
Factors Influencing the Market
Rising Interest Rates and Stricter Assessments
The drop in conversions can be partly attributed to the increase in interest rates and more rigorous affordability assessments by lenders. Vic Jannels, CEO at the ASTL, points out that while initial inquiries and applications may be high, the journey to completion is not as promising as in previous years.
A Shift in Lender Strategies
Lenders are exercising greater discretion in progressing applications. Luke Navin from Century Capital observes an influx of applications previously suited for high-street banks now entering the short-term space due to stricter lending criteria and rising interest rates, leading to a lower conversion rate overall.
Valuation Challenges
Rob Roscoe of Colenko highlights ‘down valuations’—where the estimated value of the property is less than expected—as a significant hurdle, particularly for refurbishment loans. These down valuations can be due to increased costs for materials and labor, impacting the viability of loans.
Exit Strategy Issues
Another challenge mentioned by Roscoe is providing evidence of a viable exit strategy, such as transitioning to a Buy-to-Let (BTL) facility, which has become more difficult due to affordability restrictions.
The Future Outlook
Potential Market Adjustments
A reduction in transactions is expected, but this may be counterbalanced by refinance and rescue deals. However, as the market adjusts, some lenders may exit, leading to narrower spreads in ‘vanilla’ bridging and regulated segments.
Unchanged Conversion Rates Amidst Challenges
Matthew Dilks from Clever Lending notes that despite conversion rates remaining stable, securing deals has become tougher due to a combination of stricter criteria, decreasing property prices, and caution among surveyors.
A Time for Specialization
James Bloom of Alternative Bridging emphasizes the need for specialist lenders to navigate the current active but challenging market. Tighter criteria and a softer market could lead to lower conversion rates, though deals are still available.
Diverging Views on Market Conditions
Despite the general trend of declining conversion rates, not all industry players are experiencing the same. For instance:
Positive Trends
Jonathan Samuels from Octane Capital suggests that as borrower expectations align with property price realities, the impact of down valuations should lessen.
Lorenzo Satchell of Hampshire Trust Bank notes an increase in their conversion rates, indicating that investors are leveraging current market conditions.
Adam Butler at Avamore Capital also reports increased bridging inquiries and conversions, highlighting a responsive market that is adapting and innovating to meet changing demands.
Bridging the Gap
The current environment suggests a greater need for bridging loans due to affordability issues with long-term mortgages and developmental delays. Lenders are adapting their offerings to accommodate these needs, creating opportunities despite the challenges.