Bridging loans have changed dramatically. Once seen as expensive emergency finance, they are now often one of the fastest, most flexible and most cost-effective ways to raise short-term funding — provided that they are arranged with the right lender, on the right terms.

The Evolution of Bridging Loans – From Expensive to The Cheapest and Best Option

Bridging loans have traditionally been associated with situations where a borrower needs to purchase a new property before the sale of their existing home has completed. This means the loan ‘bridges’ the gap between sending funds to buy and receiving funds later having sold.

Since property purchases usually involve substantial amounts of money, bridging loans tend to be relatively large sums, so opting to have one is always going to have a significant cost. This is why it is not a common practice to buy and sell homes using bridging loans, only when help is required to make the whole process easier.

Before the 2008 credit crunch, high street banks would provide bridging loans alongside other specialist products. However, following the crash, the banks withdrew most of their ‘specialist’ lending facilities to consolidate their activities, reduce overheads and focus on their main products, such as mortgages, overdrafts and bank loans.

This created a gap in the market, which led to the emergence of new specialist bridging lenders, who stepped in to fill it.

In March 2009 the Bank of England Base rate was only 0.5% pa and the ‘best priced’ bridging loans could be obtained from around 10.7% pa (0.89% per month). This made the difference between the Bank of England Base Rate, and the leading bridging rate 10.2% pa.

Since then, more new lenders have entered the bridging market, leading it to become dramatically more competitive. As a comparison, the 2009 ‘best priced’ bridging rates were more than 10% pa higher than the Bank of England base rate. Today that gap has fallen to around just 2.5% pa, highlighting how much the sector has matured.

GOOD - A large part of the bridging industry has evolved dramatically in recent years, with the difference between leading bridging loan rates and the Bank of England base rate shrinking significantly from around 10% per annum in 2009 to approximately 2.5% today. Therefore, bridging rates are now very competitive when compared to other low-cost methods of finance.

UGLY - The competitive and exciting side of bridging is unfortunately spoilt by a minority of bridging lenders in the market who damage the reputation of bridging through:

These lenders continue to fuel the belief among the critics that bridging is expensive and can easily cost borrowers huge amounts of money!

However, when structured properly, with the right lender, bridging loans are an enabler!

Bridging Loans Have Many More Uses Today

Whether a bridging loan is the best option will depend on how the funds are intended to be used and how it compares with other alternative forms of finance that may also be available for the borrower.

There are a number of situations where bridging finance stands out as being the best option, usually due to its speed, flexibility and cost-effectiveness.

Bridging loans are often the leading finance option for the following uses:

1. Buy before you sell – Using a bridging loan to fund the purchase of a new home before you have sold your current home. This helps secure the property you want and removes chain risks.
2. Buying or refinancing unmortgageable properties – Many properties are classed as unsuitable security for a standard mortgage. This is usually due to:
   • Structural issues with the property
   • No working kitchen or bathroom
   • Having a short lease
   • Being a non-standard construction, for example Precast Reinforced Concrete panels (PRC) or Cornish Unit houses
   • Significant refurbishment being required
   • Unfinished new build or conversion

   Bridging loans can usually be secured against these properties, providing the funds to purchase, and if required, to also renovate the property. Upon completion clients will usually either sell the property, using some of the proceeds to clear the bridging loan, or, now the work is complete, refinance it using a standard mortgage.

3. Auction purchases – Although Modern Method Auctions allow 56 days for completion, other style property auctions require just 28 days, sometimes even less, to complete purchases. This can be too tight for many funding options, whereas bridging loans can be completed quickly.

   Many properties purchased at auction are in a poor state of repair, making them unsuitable security for standard mortgages. These are the two main reasons why many auction purchases are funded using bridging finance.

4. Development projects – Perfect funding option for developers who want to buy a property to improve. This may just involve some decoration and light cosmetic work, perhaps a new kitchen and bathroom, or a full refurbishment with an extension. Once the improvement works are complete, the property is then sold, or sometimes refinanced and kept as an investment property.
5. Flipping properties – This is when a property is purchased for a bargain price and then sold for a quick profit. When an opportunity to buy a below market value property comes along, a bridging loan can provide funding quickly, then is repaid once the property is sold.

   In addition to the speed that bridging can provide, many bridging loans now have interest rates comparable to the cheapest forms of long-term finance, with the added advantage of no early redemption charges or exit fees. When buying with cash isn’t an option, bridging is therefore an ideal funding solution for this type of transaction.

6. Development Exit Finance – Development finance is very specialist and when compared to some bridging facilities it can be expensive, due to higher interest rates and monthly fees. Bridging loans are therefore often used by developers to repay their development finance whilst they are waiting for their newly developed properties to sell. Development exit bridging loans are usually taken out as soon as possible in order to maximise savings, this is often once the development is wind and water tight.
7. Repossession prevention – Stopping repossessions, replacing secured finance facilities that have reached the end of their term and are under pressure to be repaid, and getting a property back after repossession. Bridging enables the borrower to prepare the property for sale and maintain control of the sale process.
8. Fast funding for any purpose – Fund a business order, provide cashflow or move quickly on a great opportunity that has come your way. Can also be a quick way to release funds to clear urgent debts, therefore avoiding receivers and forced sales.

Caution

Bridging loans have many uses but are not intended as a long-term finance option.

You need to have a good exit route, a reliable plan about how the loan is going to be repaid.

If your preferred exit plan is a little uncertain, then make sure you have a reliable back-up plan. In these circumstances make sure your back-up plan is progressed so that it is in place and ready to go if it is required.