Buy-to-let investors, developers and property auction buyers have used bridging loans for many years. This type of loan is often used as a financing vehicle for a short-term period, available at higher interest rates when conventional financing is not available.
However, from March 2020, when the Coronavirus pandemic first hit the UK, bridge loan usage has risen by 28%, primarily because homeowners have been struggling to manage sale and purchase transactions.
The property sector has been chaotically busy, pushing homeowners into applying for short-term, expensive financing while waiting for another property in a chain to complete.
Growth in UK Bridge Loan Financing
In the early days of the global health crisis, bridge loan borrowing across the UK was at around £122.9 million but fell sharply as the sector was put on hold and estate agents closed their doors.
By quarter two, volumes had dipped to £79.4 million.
Government initiatives such as the Stamp Duty holiday injected momentum into the market, and homeowners rushed to take advantage of lower tax bills, expediting moves before the tiered tax relief ended.
In the first quarter of 2022, British homeowners had £156.8 million in bridging finance debt, representing a jump of 28%.
The Background of Bridge Loans
A bridge loan is so-called because it forms a bridge between a property purchase transaction while the homeowner is waiting for their previous residence to sell or complete.
Although this type of finance has not conventionally been used so widely in the residential market, the increase in borrowing has enabled homeowners to proceed with buying a new property without having to wait for a chain.
The benefit is that a bridge loan is very fast to set up but requires security - normally secured against a property, which the lender could repossess if the borrower falls into arrears.
Typical Reasons a Homeowner Might Apply for Bridging Finance
Given the pace of property sales during the Stamp Duty holiday, most homeowners who took out bridge loans did so because they didn't want to miss out on a lower purchase cost when their chain fell apart.
Waiting too long could also mean missing an ideal property, whereas a bridge loan enables the purchase to proceed without delay.
Another reason to consider a bridge loan is to buy a property in an auction, which means the buyer has 28 days to remit the balance after paying a deposit on the day.
Advantages of Bridge Finance
The primary advantage of bridge loans is that they take just days to acquire, and homeowners can borrow a fairly sizable value, securing the borrowing against a property - not something most mainstream lenders will consider.
Paying back the loan as soon as possible is preferable, but the repayment conditions are flexible and can be tailored to the applicant's requirements.
Disadvantages of Bridge Finance
The downside is that, because the loan is secured against a property, it could be repossessed if it is not repaid or the borrower falls into default.
While you can borrow a large value and complete the loan application fast, the fees and interest rates are far higher than you would expect to pay on average.
This form of property loan has become more popular since the pandemic began simply because the market has been moving quickly, and buyers are keen to buy properties, causing longer transactional chains.
Unstable chains mean that associated professionals, like solicitors and surveyors, have a knock-on backlog of work, exacerbating the situation further.
Buyers may decide to use a bridge loan as a short-term solution to ensure their property purchase can proceed. However, they must be cautious because interest rates have spiked in the last few months and are not expected to plateau for some time.
It is important to consult an experienced broker before applying for bridge finance - Revolution Brokers are available to help if you require assistance or need to evaluate the best options available.
