8 minute read
Cover: Justin Trowse
Thinking on your feet: the leading lender making huge strides in bridging
Born out of the 2008 crisis, LendInvest fittingly developed a nimble approach to bridge lending, swiftly adapting to unpredictable market changes and leveraging technology to stay ahead of the game.
Since its inception, London-based LendInvest has reportedly lent more than £4 billion in mortgages, spurred on by their mission “to make property finance simple,” having built an asset management platform that’s been designed to simplify and speed up mortgage lending.
The result has been a better customer experience for its borrowers as well as intermediaries and investors. Profitable since 2015, the company also became the first UK fintech to securitise a portfolio of buy-to-let mortgages in 2019.
The opportunities for bridging seem boundless. According to the latest Ernst & Young UK bridging market study, bridging products have now been thrust into the mainstream lending market in response to a growing focus on the residential property sector, sparked by the recent stamp duty waiver and a need to secure preferred properties quickly.
But like everyone else in the financial sector, bridging lenders also face important challenges for the remainder of the year, as highlighted by the survey, in the shape of increased competition, skilled labour shortages, and the ongoing race to adopt the latest technology – all this in addition to the Bank of England’s recent decision to increase the base rate to the highest level in 13 years.
But although the BoE’s rate rise was flagged “as a potential threat to the profitability of bridging lenders,” the study pointed out that there was still an “appetite for larger loans,” with 28 per cent of respondents looking to offer larger facilities over the next 12 months.
Mortgage Introducer caught up with Justin Trowse, director of bridging finance, to discuss LendInvest’s portfolio, its business ethos, the company’s growth during the COVID pandemic, and what the future holds in a rising-rate environment.
How is the commercial property landscape beginning to look for you post-pandemic? Have you bounced back to pre-pandemic levels of business?
In terms of COVID-19, I think we’ve been quite lucky. As a sector we’ve had quite a lot of government aid in terms of stimulus and also initiatives like CBILS and similar schemes. We all thought it was going
→
to be another financial crash and undoubtedly had our concerns, but we did very well during the crisis. A lot of our competitors stopped lending to protect their business, but we carried on lending, and as a consequence we picked up a lot of business in terms of volume that we wouldn’t normally.
Given how COVID affected the industry, how big a role does tech play in your company?
Implementing new technology during COVID was key to adapting to the situation, but due to our existing platform infrastructure, in terms of actually processing loans, we were in a good spot because we already had an online portal to deal with volume, and the systems and processes within the portal were already there and set up for doing things remotely, including e-signatures and producing documents through that production workflow.
What was behind the decision to continue lending when a lot of your competitors decided to pull out?
There’s a couple of reasons. At LendInvest we have a hugely diversified funding base, whereas some of the lenders are reliant on one or two. If that small pool of investment dries up, you don’t really have a choice but to shut up shop. The second reason, quite frankly, is that our business was born during the financial crash of 2008. Despite forming from a crisis, we had admittedly not been tested through another significant recession, and we believed strongly enough in our business model to finally weather this one. We of course also would not want to let our existing customers down, so decided to innovate instead of panic.
Businesses have had to deal not only with COVID but with the impact of Brexit. Did Brexit make bridge lending more, or less, competitive?
Brexit was obviously a big part of the macro calendar. Again, we were lending through that and picked up some business from other lenders that weren’t willing to assess their criteria to adapt for the risk. But what gave us the confidence to do that was having an experienced capital markets team, so we put various hedges in place just in case it went a way we weren’t expecting it to go.
We’ve spoken about what happened in the past. Now we’re facing soaring inflation, a rising rate environment, and a cost-of-living crisis fuelled by rising energy costs. How challenging are the market conditions for bridging this year? And to what extent is the bridging sector a barometer of the wider economy?
That’s quite an interesting one, because I don’t think anyone really knows yet. But what we’re starting to see is a bit of yield compression. In the emerging market as a whole there’s a hell of a lot of new entrants – it’s very competitive.
I think this last week we saw the first bridging lender in the market increase their rate relative to the interest rate benchmark, which has not been seen for quite some time. We don’t currently have that approach on our standard lending, although we are looking at this on our development finance lending, especially for longer-term periods, because inevitably rates are going to rise, so we need to build that in to our model. But at the moment we are pricing bridging on a fixed-rate basis, which is not linked to any interest benchmarking.
Are regulated bridging loans becoming more popular?
I’d say so. It’s becoming affordable. The market has fewer loan-sharking connotations and a greater degree of professionalism these days. So I bring it back to the example that our rates start from 0.48 per cent, so on an annualised basis, that’s 5.76 per cent. And if you were to price that over the base rate, which today is currently about one per cent, that’s equivalent to a loan at 4.76 per cent per annum. That’s not too far off term rates for people who aspire to secure their dream property and get some quick access to cash, which is basically a regulated bridging loan.
What percentage of your business is focused on unregulated bridging loans?
At the moment I’d probably say 90 per cent of our business is unregulated. That’s our main core market, and then regulated makes up the remainder. The Ernst & Young bridging trends report said that 47 per cent consider a bridging loan the most important for refurbishment purposes. The next most common is business purposes. That’s very fitting within the business that we’re focused on. Within our products, probably the most popular is the refurbishment product because customers want high leverage to make it capital-efficient. They want the flexibility of the additional capital, without monitoring. Our leverage is at 75 per cent net, whereas most of our competitors only have the ability or appetite to get
to 75 per cent gross. Our mantra is, if you know what you’re doing, here’s the cash and get on with it, because at the lower loan quantums, typically you’ve got monitoring and other large soft costs that eat into your profit margin quite considerably.
Critics say bridging loans are risky. Borrowers need an exit strategy, and they have high-interest loans to contend with that also involve higher borrowing costs. How do you counter those arguments?
I’d say the market has moved on. It’s got a lot more professional, and the way you assess deals has changed as well. We wouldn’t ever go into a deal and put borrowers in a situation where they couldn’t exit the loan. It’s not only about morals, it’s also the fact we want our capital back and paid up. So, for instance, on a pre-planning bridge, we have a look to see whether it would fit into a development loan model for an exit. And in terms of rates being expensive, obviously the connotation was there maybe five or ten years ago, but, as we know, the low-rate environment has given lenders cheap access to capital, and they’ve been able to pass that benefit on.
I’d like to ask you about the wider economy. Given that some observers have been predicting a 1.25 per cent base rate before the end of the year, do you think interest rates could rise much farther?
My personal view is that they will. The official figure is nine per cent inflation, but some critics say the real rate of inflation is much higher than that. The BOE is currently implementing rate rises of 25 basis points at a time, which I don’t think is going to be enough to combat the current situation. We obviously “We wouldn’t ever go into a deal and put borrowers in a situation where they couldn’t exit the loan. It’s not only about morals, it’s also the fact we want our capital back and paid up”
have to do that in increments to avoid a shock to the market, but essentially, I do think rates are going to have to rise. I think we’ve had it good for quite some years, and we’re due the next cycle.
In this scenario, do you think mortgage demand will fall?
I don’t think mortgage demand will fall hugely, as we still have a supply/demand issue when it comes to housing. I think prices will cool, but I don’t think we’ll have any crash if we’re talking purely rates rises and no other catalysts. I think we’ll be good, certainly at least for the next few months.
In such a challenging environment – and without giving away too many trade secrets – what advice would you give brokers entering the space?
I’d choose a set of lenders that you can depend on and that have the means to execute efficiently. There are a lot of intermediaries that spread themselves quite thinly in terms of using multiple lenders. My advice is to work on building a relationship with someone who can perform and also with whom you can keep a client, because in the end, it becomes more beneficial for the introducer and borrower.
