Why did banks stop doing bridging loans?

I was asked this today and I didn't know the answer. I said it was due to the lack of security, but that argument doesn't stand up to scrutiny.

Say I have a house worth €500k and a mortgage of €200k.
I want to buy a house for €600k.

Why would the lender not give me a loan for €600k secured on the house I purchase + cross secured on my existing home?

I have €800k of loans on €1.1m of property.

I could act irresponsibly and not sell my own home as agreed. But I would think that is rare enough.
Of course, if house prices crash before I sell my existing home, I could be in trouble with a huge loan I could not afford.

But if I have exchanged contracts for the sale of my own home, then surely a 100% mortgage on the new property would not be risky?

Did the lenders get caught out by bridging loans going bad?

Brendan

AFAIK they stopped it soon after the crash in 2008.

There was some debate on AAM before (I can't find the link).

The logic was that underwriting is expensive and the profits are small given how short term the lending given the risks are quite large (sale falling through). Banks can't charge fees for lending due to a prohibition in the Consumer Credit Act.

I think they stopped long before 2008, can't remember when they last existed.

But I think the reason had more to do with the fact that if one house didn't sell the customer was left with two mortgages that they could not afford to pay. Bridging was not originally stress tested or income tested the same way a mortgage is so in general the income criteria to meet the two mortgages was not there plus I also think bridging was done on an interest only sort of basis if any payments at all. I just can't remember that far back but was it not more like a giant overdraft that you just cleared in full when you sold the property. Obviously then they got burned too many times to keep offering it.

There is no problem with Brendan's example if the income supports the total mortgage, that's more a case of two mortgages rather than what bridging actually was.

I'm not a banker (with a b) but I would have thought that bridging was always just a bit of a loss-leader for a bank to get the business on the more profitable long-term loan that would stick. Lots of extra work, separate loan offer, more legal work, they can't get a charge over your existing house unless your mortgage is already with them, risk (however small) that you can't / won't sell the existing house and all for what - a couple of months' interest? I suppose they could have always charged a whopper fee for a bridging loan but then run the risk of being accused of a rip-off.

Dave Vanian said:

I would have thought that bridging was always just a bit of a loss-leader for a bank to get the business on the more profitable long-term loan that would stick.

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Agree that it's not profitable to lend for the short-term as the admin costs are way too high.
But if one of the lenders announced that they were doing bridging in cases where contracts were exchanged for the sale of the existing house, I would say that they would get a fair bit of goodwill and business.

And maybe charge an admin fee for setting it up.

NoRegretsCoyote said:

Banks can't charge fees for lending due to a prohibition in the Consumer Credit Act.

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Are you sure?

I thought that some did.

Brendan

A

Brendan Burgess said:

Are you sure?

I thought that some did.

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A pretty knowledgeable poster had once said that.

But I looked and Section 132 of the Act seems to provide for underwriting fees.

Brendan Burgess said:

But if one of the lenders announced that they were doing bridging in cases where contracts were exchanged for the sale of the existing house, I would say that they would get a fair bit of goodwill and business.

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I would tend to agree. A customer would tolerate a higher interest rate over a term if bridging could be arranged too.

Monbretia said:

But I think the reason had more to do with the fact that if one house didn't sell the customer was left with two mortgages that they could not afford to pay. Bridging was not originally stress tested or income tested the same way a mortgage is so in general the income criteria to meet the two mortgages was not there

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That's my belief, also.

Obviously, there are a few different potential risks :

- the property doesn't sell / doesn't sell for the price that was expected.

- the value of properties starts to stop, so people who have contracted to buy, start breaking those contacts.

I understand that a non - bank lender, called "Onate" is providing bridging finance these days, but I've no idea what terms are on offer, and think they may exclude PDHs. Has anyone dealt with them, or looked into them, even?

A question was asked in the Dáil about it in 2019

Jan O'Sullivan​

Question:
113. Deputy Jan O'Sullivan asked the Minister for Finance if his attention has been drawn to the difficulty persons who wish to downsize are experiencing in accessing bridging loans; if this issue will be addressed in his contact with the Central Bank and the wider banking sector; and if he will make a statement on the matter. [14452/19]

Written answers (Question to Finance)​

Minister for Finance​

There are a number of regulatory measures which apply to the provision of new residential mortgage credit, including bridging finance for such a purpose, to consumers. These include the European Union (Consumer Mortgage Credit Agreements) Regulations 2016 and the Central Bank Consumer Protection Code (2012). These measures place a number of obligations on lenders in relation to the provision of residential mortgage credit including the requirement to:
- where relevant, obtain relevant information from the borrower on his/her needs and objectives, personal circumstances and financial situation;
- assess the affordability of credit and the suitability of a product or service based on the individual circumstances of the borrower;
- provide credit only where the creditworthiness assessment indicates that the borrower is likely to meet his/her obligations in the manner required under the credit agreement.
However, within the applicable regulatory framework, it remains a matter for each lender to set its own credit policies and to make its own lending decisions on applications for mortgage or other credit. Neither the Minister for Finance nor the Central Bank of Ireland, has a role in such commercial decisions made by lenders. However, I have been informed by the covered banks that, while in general they do not see a strong demand for residential bridging finance, they will consider and assess such applications in accordance with their own credit policies.

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Are they routinely provided in other countries? Just wondering if its a situation particular to Ireland.

Seniors Money is there as potential bridging for a downsizer.

Peanuts said:

Are they routinely provided in other countries?

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Yes. Basically you get a new mortgage on the new property.

Mortgage on your existing property converted to interest only with full repayment within a year.

I wonder if the Central Bank's 20% deposit rule for second and subsequent buyers would interfere with bridging finance of this type.

Personally, the availability of some sort of a bridging loan would take a lot of pressure off my and husband's situation. Trying to move to Tipperary to a town where there are few properties coming up for sale. We cannot take the risk of selling our home in Dublin (mortgage left is 120K and it was valued at 420K last summer) as a suitable house might not be available for months, and there is no rental market down there either. We only have 30K saved, so have to get a remortgage to release equity in order to raise a deposit for the house we do find in Tipperary (which will be less than 300K as they are in that zone at the moment), and THEN look at selling our current house. So complicated.

I was asked this again yesterday and I don't see why banks don't give 100% mortgages temporarily to people who have exchanged contracts on their old homes.

For example

Let's say
Existing house worth €500k
Mortgage €200k
Equity €300k

Buying new house for €800k
Take out a mortgage for €800k with Bank of Ireland as long as I have contracts for sale exchanged on existing house and solicitor gives undertaking to pay net proceeds off new mortgage.

Exceptions can be given for such lending in excess of 90% LTV. But maybe they don't want to use up the exceptions.

I would choose the lender who offered me this facility even if the rates were not attractive.

Brendan

Of course, if I have a house worth €800k which I want to sell and trade down to a house worth €500k.

It makes no financial sense for the lender to give me a mortgage of €500k which will be cleared in three months, when I sell my home.

Brendan

Brendan Burgess said:

It makes no financial sense for the lender to give me a mortgage of €500k which will be cleared in three months, when I sell my home.

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...but if they are charging you bridging rates they will make a hefty bit of interest for very little work. €500,000 @ 5% for 3 months is over €6k.

TrundleAlong said:

months is over €6k.

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But how much does it cost to set up the loan?

And what is the risk?

And the cost of funds?

Brendan

Brendan Burgess said:

But how much does it cost to set up the loan?

And what is the risk?

And the cost of funds?

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Back in the 1970's and 1980's we often did bridging loans in the BOI. I am sure the risk/cost then was the same as the risk/cost now.