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Addressing the key challenges facing bridging loan providers

Head shot of SteveBy Steven Piper, Founder

The number of lenders operating in the UK’s short-term finance market has grown enormously in recent years. Bridging loan books totalled £4.3bn at the end of Q3; an increase of more than 5% on the same period last year.

What’s more, bridging loan applications totaled £6.1bn in Q3, up by almost 17% compared with the same period last year. 

Following a strong quarter, Benson Hersch, CEO at the Association of Short Term Lenders (ASTL), estimates that total loans written for the year will be in excess of £6bn.

Thriving in the face of adversity

There is no doubt that the market has remained resilient to challenges of the current economic climate. In fact, the uncertainty surrounding Brexit has had a positive impact on the bridging loan sector. 

Property prices have dropped significantly across many London boroughs which has sparked interest from both UK and overseas investors. Falling prices, coupled with the urgency to act quickly, have facilitated growth in the market. As a matter of fact, Q3 marks the third consecutive quarter whereby the most popular use of a bridging loan was to purchase investment property.

New market entrants have also stimulated growth by helping to increase awareness and understanding about the uses of bridging loans. The increased competition across the lending landscape has led to greater availability and lower pricing – attracting more borrowers, although creating further challenges for lenders.

A UK bridging market study by EY found three key trends that have emerged as a result of increased competition;

  • Lenders are experiencing margin compression largely driven by the low interest rate environment
  • Some lenders are taking on higher risk loans with an LTV above 75%
  • Firms are introducing more flexible product features, with a focus on delivering a high-quality service, and believe this will be a key differentiator in the market

Lenders advised to err on the side of caution

The latest sentiment survey from the ASTL suggests that bridging lenders have grown confidence in the UK economy despite the ongoing Brexit saga. 72% of those surveyed expect their business to grow over the next six months, compared with just 50% in the previous survey.

However, despite optimism and positive signs of growth, Benson Hersch warns that lenders shouldn’t get carried away;

“Record lending is all very well, but if it comes accompanied by the ignominious collapse of lenders, as we saw with Lendy earlier this year, then reputation of the industry will be damaged and the sustainability of lending such volumes should be questioned.”

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Are lenders prepared for market growth?

While the majority of lenders anticipate a busy six months ahead, some current trends and business practices suggest they may not be well-equipped to deal with increased lending volumes.

For example, in Q3 the average completion time on a bridging loan application rose by seven days to 51. This raises questions over the efficiency and suitability of lenders’ systems and processes.

Worryingly, some lenders are using excel spreadsheets to manage applications. This time-consuming and administrative process undoubtedly hinders growth potential. Not to mention the lack of security and ability to comply with regulations. 

Although, many lenders do use a loan management system; typically, an off-the-shelf solution designed not only for them, but also for their competitors. In a climate where differentiation is key this model seems counterproductive. 

Priorities for 2020

Dan Murray, Head of Sales at Octopus Real Estate, recently shared that flexibility, transparency and a shorter transaction time should be top of the agenda for bridging lenders in 2020. 

What’s more, lenders are increasingly looking to improve their service standards and process technology to better serve both brokers and borrowers. 

These objectives, along with diminishing profit margins and growing competition, put pressure on lenders to review their operational strategy.

Riding on technology

One of the first places that the Head of Operations, or perhaps the Head of Cases, will look to enhance operational efficiencies is their technology. 

One of the main challenges that lenders face is that none of the leading bridging loan software companies provide a fully functional package that meets all of their requirements. For example, the most well-known loan origination platforms require modules to be added onto the standard package.  

What’s more, most lenders tend to use only part of the software, as not all of the features are applicable to their business model. As a result, they continue to rely on spreadsheets for certain tasks – a haphazard approach that is most certainly counterintuitive. 

Despite the lack of a loan management platform that ticks all the boxes, the options available to lenders are, nonetheless, still expensive. The more users you add to the system to more it costs, which doesn’t facilitate growth, but rather penalizes it. For some lenders, it isn’t worth paying all that money for a half-hearted system, unless they have a long-term plan to evolve and add new products that complement their bridging offering. 

Surely there has to be a better alternative to serve a prosperous and well-established market worth billions?

A partner, not a vendor. 

Si digital are specialists in bespoke software development. Our team of developers create tailored solutions that are carefully moulded to fit lender requirements, so lenders don’t have to mould their processes to fit off the shelf software.

We understand that no two bridging cases are the same. Each case has unique characteristics and its own set of complexities which shape its risk profile. As such, lenders require flexible and agile software that allows them to navigate those complexities with ease. 

Our bespoke solutions streamline processes and drive operational efficiency. Not only can we fulfil standard requirements including;

  • Regulatory compliance
  • Workflow automation
  • Multi-product capability
  • Detailed reporting
  • Audit trails
  • File uploads
  • Client and broker portal

We also have the knowledge and expertise to address the wider challenges that lenders face. Many lenders have identified the need for differentiation through quality of customer service. Although, the renewed focus on service provision isn’t just a matter of relationship management. Technology plays a fundamental role in delivering a great customer experience to both brokers and borrowers.

Our UX and UI designers can help you to gain trust and confidence from clients and brokers by creating a simple and user-friendly platform that guides users through the process, delivering a better service experience and a more efficient customer journey.

We can help you to build better relationships with your broker network by providing quicker and more accurate underwriting decisions through the seamless flow of information.

And, we can help you to exceed client expectations of a quick turnaround time, from application to transfer of funds, by building a custom-made and fully functional system that ticks all your boxes.

Not only do we have the technical know-how to build world-class bespoke loan origination systems, we also have the in-house expertise to understand user journeys and create a seamless customer experience – and this is what will truly set lenders apart from the competition.

To learn more about Si digital and how we can support your growth plans throughout 2020 and beyond, please contact Karen Grainger, Business Development Director, at karen.grainger@sidigital.co.

 

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