Buy-to-let
The Financial Conduct Authority is warning that more customers may be seeking bridging loans as a way of circumventing Mortgage Market Review rules.
Industry estimates show bridging has boomed in the second quarter of 2014, since the Mortgage Market Review (MMR) was introduced in April.
Bridging loans are a form of short-term finance designed to “bridge” a gap while waiting for another line of funding to come through – such as from the selling of a property.
FCA spokeswoman Lynda Blackwell has told lenders that while the bridging boom is great news for the sector, and has lowered rates for customers, it’s still an expensive option.
That makes it important that bridging is only being sold where appropriate and that customers understand what they’re getting into.
Many high-risk borrowers – specifically those who took out mortgages between 2006 and 2008 – can’t find lenders willing to let them refinance and are essentially trapped in their homes, she says. They’re also vulnerable to rising interest rates.
As their loans become unaffordable and they struggle to make payments, they are likely to seek other refinancing options – tempting lenders to sell them other products such as bridging loans.
Blackwell warns that lenders should offer bridging products to people who won’t be able to afford repayments as they will just be “delaying the inevitable”. The borrower must have a “credible exit strategy” from the loan, such as downsizing their house, she says.
Pressure on lenders
While the mortgage lending market has shrunk by around 50 per cent since the financial crisis, the number of active mortgage lenders has barely fallen. There are currently 136 active lenders, with the top six cornering 80 per cent of the market.
The remainder are scrapping over a small market share, and feeling the pressure to move to riskier products and sectors, Blackwell says.
Market primed for risky lending
Blackwell says a combination of consumer appetite, lenders’ need for profits in a constrained market, and a government pushing for growth in the housing and mortgage sector are all raising red flags at the FCA.
While she admits bridging finance plays an important role in certain circumstances, concerns about conduct linger – for example, the imposition of unfair fees, and the sale of bridging when a mainstream mortgage product is more appropriate.
“We also worry about firms trying to find a way of lending to marginally credit-worthy customers – for example the right-to-buy market – by developing credit-impaired products and targeting high-risk more profitable segments such as interest-only, self-employed, bridging and debt-consolidation,” she says.
She adds: “Do you fill your boots and increase your market share, regardless of whether bridging finance is the appropriate option for the customer?
“Or do you put the customer at the heart of the decisions you make and put them first, turning away business if it’s not in the customer’s long-term interest?”
