Bridging loans have experienced massive growth year on year; it’s not hard to see why – in the fast-moving world of property, having the freedom to move quickly and avoid tightening lender criteria is key to making a profit or creating a solution.
Over the past decade bridging loans have been significantly more expensive than your standard mortgage. However, with interest rates rising across the general market – and bridging rates staying similar, they are a lot more attractive to investors.
This blog will show you how and why bridging loans are used and the advantages they bring.
What has bridging finance originally used for?
Bridging loans are a way to borrow money in the short term and are typically used when funding is needed, but it is not yet available for various reasons. There are rarely any early repayment charges which adds to their attractiveness.
Both companies and individuals can apply for bridging loans, and lenders can customize these loans for any situation. They’re often used when buying an investment property or at the end of a building project to ensure that plans don’t halt.
Help homeowners buy a new property while waiting for their current property to sell.
Another popular use of bridging loans is for renovations of a property. The bridge is taken out to pay for the renovation and once complete we approach a more competitive lender to settle the debt.
Bridging loans are also highly popular with property developers for several purposes. For property developers, liquidity is the key to starting new projects. Bridging finance allows the developer to exit their projects before completion or before the sale of their completed units, allowing them to start new projects which are key to cash flow and profitability.
Key figures/trends
According to the latest data from Bridging Trends, the sector continued to perform strongly with the average interest rate on bridging loans falling to another historic low in the second quarter of 2022 – Gross lending in Q2 grew 14% to £178.4m from £156.8m in Q1.
In the second quarter, forecasts pointed to a significant decline. However, the housing market remained extremely busy as demand continued to outstrip supply. The fast-paced housing market has increased the appetite for bridges and led to greater competition among lenders.
Pressure on buyers continued due to shortages in the housing market. Leading multiple buyers to compete for the same property, meaning it was key to secure financing quickly. We can see that purchasing an investment property was the main reason for contracting a bridge loan in the 2nd quarter, accounting for 24% of transactions. Financing a chain break came in second with 21% of total transactions.
Uses for bridging in a volatile environment
The last 10 months have been another period of unpredictability in global markets as the economy continues to recover from the waves of the pandemic – however, as ever the property market has stood strong. With recent volatility in the credit markets and scepticism in all markets, previous trends point to increase demand in bridging finance. Here are the three main reasons:
- More price competitive: Bridging finance is now not as expensive when compared to standard mortgages. As standard mortgages surge in pricing, the cost of bridging finance has remained relatively stable. This makes bridging more attractive to homeowners, investors and developers. To be able to gain from the various benefits of bridging finance at only a slightly higher cost gives high flexibility.
- Creativity: For many property investors simply buying a property and then renting it out doesn’t yield the sort of returns they are looking for in volatile markets. Bridging finance can unlock this creativity. We have seen high demand from clients who are using bridging finance to purchase properties and then refurbish them to make them higher yielding whilst increasing their value. The most common example is converting a property into an HMO.
- Liquidity: Clients have been rather hesitant to fix their mortgage through a standard lender as they don’t want to incur the early repayment charges when rates do start to decrease – which according to commentators will be in the summer-autumn of next year. Therefore, to be able to solve the liquidity problem they use bridging as it becomes cheaper in the long run and more profitable.
The surge in demand over the past few years has brought new bridge lenders to the market giving far more bargaining power to the consumer. This can be seen in pricing and flexibility. GET IN TOUCH.
