April 2018
By Nicholas Debany, credit analyst at Bridge Invest
In the aftermath of the global financial crisis in 2008, we’ve seen one of the largest expansions of credit - courtesy of central banks the world over - making capital cheaper and more plentiful than ever before. ‘Sub-prime’ has become a dirty word, with traditional financial institutions avoiding large swathes of potential borrowers. A poor credit history with County Court Judgments, winding up orders or an underperforming business history will be a red flag for many lenders.
Risk-based pricing dictates that adverse credit borrowers should be charged more for a loan, relative to less risky individuals. Although their interest rates will inevitably be higher, those with poor credit should still have the option of borrowing, as opposed to being shut out of the market. Access to credit is not just an economic concern but a social one as well. Financial mistakes stay on individuals’ credit rating reports for years; even an individual whose current financial situation implies a low risk of default can be hamstrung by adverse records from years past. The ability to buy now and pay later is crucial to a functioning economy, and far too many are unable to take advantage of this. Giving those with poor credit a chance to borrow enables them not only to smooth their consumption or deal with emergencies, but allows them to rebuild their credit. Where high street banks have refused to do so, non-traditional lenders have made important strides in lending to this underserved market.
Lower interest rates and tightening credit spreads have encouraged borrowers to enter the market via new lenders who have innovative financing options. The methods used to provide financing are as diverse as the end uses for the money. Finding timely funding for an ideal property, whether to live or simply invest in, is incredibly difficult for borrowers with adverse credit. The growth seen in the property bridge finance industry shows the strong demand, and need, for alternative lenders in these situations.
Unlike high street offerings, bridging lenders can approve a loan decision for borrowers with patchy credit histories quickly and painlessly. The key difference is that bridging lenders, such as Bridge Invest, are willing to consider taking other assets (like business or personal assets) as security, or using structures such as third-party charges or equitable charges. Non-traditional lenders have the capabilities to understand borrowers’ past difficulties and use their expertise, flexibility and risk appetite to lend against the property being purchased by the borrower, unimpeded by the risk-averse policy restrictions now constraining traditional real estate financiers from lending into this space. Returns to investors are also attractively high, reflecting the true risk-reward nature of property bridging lending.