Risk

The market reacts to 85% bridging LTVs



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With the bridging market heating up with competition, lenders have debated the benefits and risks of increasing LTVs as a way of gaining more market share.

A survey conducted by Bridging & Commercial found that 73% of specialist finance professionals felt that bridging LTVs at 85% were risky with 27% arguing that they weren’t.


 

“Higher LTVs leave lenders with less room to manoeuvre if things don’t go to plan, leaving lenders potentially facing losses,” warned Benson Hersch, chief executive of the Association of Short Term Lenders. 

“This is particularly the case at the moment as the market is very skittish.”

Meanwhile, Matthew Tooth, chief commercial officer at LendInvest, added: “…The historical evidence is that in a property downturn the lenders who have lent at the highest LTVs end up losing the most.”

Michael Dean, principal at Avamore Capital, said 85% LTVs were risky at this particular point in the cycle as property prices were more likely to fall than rise. 

“…Meaning an 85% LTV now might be 90-95% LTV in 12 months’ time.

“Throttling back on risk would be the most logical step for most lenders given the market conditions and political/Brexit uncertainties. 

“However, we aren’t seeing that across the market as the more established volume lenders are pushing boundaries on price and leverage.”

Michael pointed to the current state of the bridging market and the large amount of competition between lenders in that space. 

He claimed he had seen some mainstream lenders increase LTVs, which was a function of the large volumes of cash chasing a limited pool of opportunities. 

“Accordingly, the only way to achieve differentiation is either price or leverage in order to achieve market share. 

“Given that pricing levels are now at unprecedented lows, the only way to stand out is by offering higher leverage deals. 

“This is something we are offering to the market with our 80% LTV bridging products, provided in conjunction with a handful of junior lenders who are willing to take the higher levels of risk. 

“We expect these products to be matched or exceeded for a time, but also expect that the products will be withdrawn from the market if the property market fundamentals start to falter materially.”

Jack Coombs, director at Aspen Bridging, added: "Higher LTVs are risky if you do not know the asset. 

"At Aspen we have a healthy appetite to risk and aim to offer high LTVs by applying an additional level of rapid analysis. 

"By taking time to visit every property (often the day after quoting) we have found a way to make deals work where others sometimes do not."

Jonathan Sealey, CEO of Hope Capital, said there were occasions when a higher LTV could be acceptable. 

For example, when a developer is carrying out a refurbishment that will increase the value of the property and therefore lower the LTV.

However, Jonathan claimed that he had already seen a move by a number of lenders to lend at higher LTVs when they haven’t been able to get enough business in the ‘vanilla’ bridging market.

“This is definitely a more risky strategy, however, which might be fine while things are going well, but may well result in a fall if the economic environment becomes a bit more rocky.  

“Undoubtedly some lenders will continue to lend at higher LTVs as standard, but that wouldn’t be for us.”

Matthew also questioned those who upped their LTVs, adding: “Any lender chasing business by offering high LTVs is likely to be adversely selected by borrowers who are over stretched and will be the first to default when the market sours. 

“With this in mind, we wouldn't expect lenders to raise their LTVs on bridging finance above 75% as it's very doubtful that banking regulators or capital markets funders would allow it.”

Meanwhile, Benson concluded: “There is increasing competition in the bridging space at the moment with a number of new entrants coming into the market.  

“This may inevitably lead to some lenders relaxing their criteria and moving to higher LTVs.  

“However, I expect these lenders to be the exception, rather than the rule.”

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