Why do Bridging Loans have a bad reputation?

How true is it that bridging loans have a bad reputation for being expensive and having expensive catches that can lead to borrowers having their properties repossessed?

The bad reputation of bridging loans is, in our opinion, partly true and partly the result of misunderstanding.

There have certainly been cases where bridging finance has been used for the wrong purpose. A bridging loan is designed to be a short-term facility, usually where there is a clear plan or future event to repay the loan. For example, a property sale, refinance, or completion of improvement works that mean longer-term funding can be put in place.

Problems can arise when bridging loans are used as a substitute for long-term finance, particularly where there is no realistic exit strategy.

This happened more frequently in the past, especially following the credit crunch. When self-certification mortgages disappeared and mainstream lenders tightened their criteria, some people turned to bridging because they were unable to evidence sufficient income to qualify for a longer-term mortgage, or because they did not have the funds to make monthly payments, so were attracted by the ability to add interest to the loan facility.

This is when bridging is used as a last resort, and where bridging loans can become very risky and costly.

Historically bridging had a very different image

Back before the credit crunch, high street banks commonly offered bridging loans, usually for fairly straightforward residential timing issues such as buying a new home before selling the existing one. Those loans were often priced at a relatively small margin above Bank of England base rate, with a comparatively low arrangement fee.

In pure lending terms, they were not expensive money. However, because the loans were often used to buy houses, the amounts were often large. Therefore, the actual cost in pounds and pence could still feel substantial to the borrower. So even when the pricing was reasonable, the perception was that bridging was costly.

After the credit crunch, the high street banks largely withdrew from specialist finance and a wave of specialist lenders moved in to fill the gap. At that point, pricing increased significantly. Some lenders also charged high default costs and interest, extension fees and renewal fees.

In the unregulated bridging market, enforcement could also move very quickly if a loan defaulted. Lenders may be able to appoint LPA receivers, who can take control of the property, collect rent, manage the asset and potentially sell it to recover the debt. For a borrower already under financial pressure, that can be an extremely difficult and expensive position to challenge.

So yes, much of the bad reputation is earned. There have been borrowers who were poorly advised, lenders whose fees and default charges were excessive, and situations where the consequences of default were severe. In those cases, it is easy to understand why someone might walk away feeling that bridging finance was a trap.

But this is not what bridging finance is meant to be.

Used correctly, bridging is a legitimate and valuable short-term funding tool. The key is suitability. A good broker and a good lender will today focus heavily on the exit route, why the loan is needed, how long it is needed for, how it will be repaid, and whether the repayment plan is realistic. The exit strategy is the central part of responsible bridging lending.

The market has also become more competitive and, in many areas, more professional. Pricing has improved significantly from the levels seen after the credit crunch, and the many good lenders and brokers in the market are far more focused on transparency, affordability where relevant, and what is best for the borrower.

Ultimately, bridging finance is not inherently predatory. It becomes high risk when it is used as a substitute for long-term borrowing, when the borrower has no clear exit, or when the lender’s model is too heavily geared towards profiting from default.

When it is used for the right reason, over the right term, with a credible repayment strategy, it can solve problems that mainstream finance simply cannot solve, or can not solve quickly enough.

So I would say the product’s bad reputation is partly justified by historic misuse and poor practice, but it is also unfairly applied to the whole sector. A bridge is supposed to get you from one side to the other, it is not somewhere you are meant to live.