What is a bridging loan?
A bridging loan is a short term finance solution to ‘bridge’ the gap between the time when you require funds quickly, for example to purchase a property, and the time when you expect to receive funds to use to repay the loan. They must be secured on property and are typically arranged for a term of 12 months. Bridging loans make it possible to purchase property before having sold your own but can be arranged for all sorts of other reasons.
How did the bridging loan market originate?
20 years ago, the bridging loan market was in its infancy, with a limited number of lenders operating in a relatively small, niche market. However today, the bridging market has grown beyond all recognition.
As early as the 1960’s short term finance, similar to today’s bridging loans, were available, but this was usually only provided through the high street banks and building societies to known customers. However, the credit crunch of 2008 was the catalyst that revolutionised the bridging market.
The impact of the credit crunch on the bridging market
As a result of the credit crunch, the main high street banks, HSBC, Barclays, Lloyds TSB and RBS Nat West, along with other traditional sources of finance, became increasingly reluctant to lend.
Customers who were unable to meet the enhanced lending requirements looked for alternative options. At the same time bridging lenders saw a gap in the market that bridging finance could potentially meet.
Where property chains were falling through due to one party’s inability to obtain a mortgage, bridging offered an alternative option that allowed the purchases to proceed and sale chains maintained.
At the same time the crunch meant there were some great property bargains to be had and bridging also offered a way for potential investors to take advantage of these opportunities.
Bridging finance offered the speed and common-sense approach to lending requirements that other traditional sources of finance couldn’t match. It also enabled people to buy up properties that needed renovation in order to make them habitable, so were unable to secure traditional mortgage funding.
Why did so many new bridging lenders enter the market?
As demand increased so did the number of lenders entering the market. This resulted in the bridging industry taking off and growing at an impressive rate, with new lenders entering the market every month.
At a time when the rate of return on investments was pitifully low, those with money to invest saw the return on lending to the bridging market as very attractive. With average market returns running at around 1%, the potential to earn in excess of 18% by lending in the bridging market attracted a raft of new investors, which further supported the sector’s growth.
Most of the new entrants into the market focused on unregulated business. This mainly consisted of commercial lending, with an increase in the number of people buying and doing up residential properties to then sell or rent out.
How did the changes in the banking regulations affect the market?
The tougher mortgage lending rules that came into effect in 2014 had a major impact on the traditional mortgage market. The changes were designed to try to stop irresponsible lending and focus on how much applicants could really afford to borrow, particularly if interest rates went up.
The days of self-cert mortgages were over, which meant that customers could no longer access traditional mortgages so easily. This gave a further boost to the bridging market which was able to offer an alternative route and options to those seeking finance.
The impact on the buy to let market
At that time the new regulations did not apply to the buy to let market. However further changes in regulations in 2007 extended the more stringent lending requirements to this market too. From this date investors with four of more properties faced tougher lending requirements and had to prove the viability of their whole property portfolio rather than just the one that they were trying to secure new borrowing against.
This tightening of lending criteria meant that an increasing number of property investors, builders and developers turned to the bridging market as a solution.
How bridging supported recovery from the recession
The growth of the bridging market certainly helped to stimulate business by enabling deals and transactions to take place that otherwise would not have completed. This helped to stimulate the economy at a time when other activity had slowed down considerably.
Bridging loans become an increasingly affordable option
As the popularity and demand has grown the price of bridging lending has fallen. Lenders have also widened their lending criteria to allow a wider range of uses for bridging as well as extending the length of time that funding is now available over.
The introduction of new funding lines has also helped to drive down costs, with hedge funds, corporate bonds and private individuals now providing funds into the market. There is also growth in crowd funding (that’s peer to peer lending) in the bridging market. See our bridging loan calculator for a detailed indication of the costs involved in setting up a loan facility.
The increase in available funds has helped to support the bridging market’s phenomenal growth and increasing affordability over recent years. Current interest rates will vary based on the size of the loan and loan to value, but rates have now typically dropped to between 0.4% to 1% per month on average. This compares favourably against the bridging rates 10 years ago which were nearer to 1% to 1.5% per month.
The future of bridging
Bridging has traditionally had a bad reputation as an expensive and potentially higher risk form of finance. However, with cheaper rates and an increase in the range of competitive products available, the market looks set to continue to grow.
As with any market, success will attract rouge elements and there will be opportunist companies looking to exploit customers through high rates and hidden penalties. Therefore, customers need to consider their own circumstances carefully to make sure that bridging is the right option for them.
However bridging looks set to remain part of the mainstream range of options available with new and increasingly competitive products emerging.