How can bridging loans be used in the current market?

An overview of the bridging

Bridging loans are short-term loans, usually up to a maximum term of 24 months, which are secured by mortgages and give a customer efficient access to financing. In addition to speed, one reason for their popularity is their flexibility. A good lender will ensure that the terms of a bridging loan best suit the borrower and their transaction needs. They will also assess each request on a case-by-case basis. The fact that property is offered as collateral allows lenders like MT Finance to assess the merits of each case and approach the transaction with common sense. The borrower’s future plans — including their exit strategy — will help guide this decision. This applies to both regulated and unregulated bridging loans, although the exact criteria are likely to be different for each.

Historically linked to home purchases and chain breakup prevention, bridging loans have a variety of other uses as well. I’ll break down some of their many uses and also explain why they’re so versatile in the current climate.

Type of bridging loans

property purchase

Bridging loans for home purchases, often seen as the bread and butter of bridging, garnered renewed attention amid the pandemic and subsequent real estate boom fueled by stamp duty. With demand far exceeding supply, borrowers with quick access to funds found themselves able to compete with cash buyers. While the Bank of England’s latest interest rate hikes are widely expected to slow the market – in fact, in July Halifax reported its first price decline in over 12 months, despite average prices falling just 0.1% – we still see strong demand. In fact, Zoopla reported in August that housing demand was still 25% above the five-year average.

While borrowers will no doubt become increasingly cautious about affordability – particularly given the rising cost of living – the high demand we continue to see makes it relatively unlikely that the housing market will collapse. Instead, quick access to funds will continue to give borrowers an edge over the competition.

chain break

According to Bridging Trends – a quarterly infographic developed by MT Finance as a way to monitor the latest trends in short-term bridging finance in the UK – financing a chain break was the second most popular use of a bridging loan in the second quarter of 2022, just behind buying one as a financial investment held property. It could be that a borrower’s mortgage application is taking too long or the sale of an existing asset isn’t completed on time. With almost two in five UK home buyers failing to buy a property due to mortgage delays, we are increasingly seeing the importance of a borrower being able to act quickly when it comes to finances.

Light and heavy renovations

The reasons for a renovation are very different. For investors or landlords, it can be a way to add value to a property and help generate the highest possible return. As rental properties remain coveted — Rightmove recently reported that there are three times as many potential tenants compared to available properties — this presents an opportunity for landlords looking to maximize their returns, while also helping to close a potential rental gap.

While a major renovation may not be the preferred option to achieve the maximum rent due to the cost of materials and an ongoing labor shortage, a light renovation could help improve a property’s overall appearance without incurring hefty bills. It will also likely take less time, which is good news for maintaining regular rental income.

In the regulated bridging sector we are seeing an increasing number of borrowers looking to free up equity in their homes to finance a renovation. Often used to maximize space, it can negate the need to move.

How renovations are financed varies. While some borrowers will take out an initial bridging loan with the goal of repaying it by refinancing at the higher value of the asset, others will seek to refinance and free up equity already held in the property. In fact, Bridging Trends reported that in Q2 2022, the type of bridging loan with the largest increase in take-up was regulated refinancing, which rose to 10% from 5% in Q1. Unregulated funding saw a more modest increase from 9% in the first quarter to 11% in the second quarter.

auction purchases

Property auctions have become increasingly accessible since the pandemic began. After originally going online, many have chosen to stay put even though restrictions have been lifted. This has improved the accessibility of auctions and allowed buyers to bid on properties that are hundreds – if not thousands – of miles away. However, the challenge of funding these purchases remains. Successful bidders are generally required to make an initial 10% deposit, with completion required in as little as 28 days. If the bidder is not a cash buyer, a bridging loan can be one of the most flexible ways to secure the purchase.

Auction properties often need some form of renovation, and a bridging loan can help cover the cost of that as well. This allows the borrower to either resell the property at a higher price or to restructure the debt against the increased value. Either outcome would allow them to repay their bridging loan.

business purposes

While business owners and SMEs seem understandably cautious about investing capital in such an unpredictable economic climate, there is still an appetite for corporate finance, albeit less than in previous years. In fact, government statistics show that the number of incorporations increased by 5.5% year-on-year between April and June 2022, while the overall register increased by 1%. For those looking for financing solutions, bridging can be an attractive proposition due to the speed at which liquidity can be provided. As with buying real estate, many lenders – including MT Finance – do not require proof of trading history, accounts or proof of income. Uses include purchasing new premises, acquiring stock, an injection of capital, or funds to facilitate a new venture.

Second Fees

Second bridging loans are a way to secure financing for a property with a mortgage and can be used for a variety of reasons including buying an investment property, renovating a property, or expanding a business. Second fee interest rates tend to be slightly higher, reflecting the risks a lender is taking. If something goes wrong, they won’t get their repayment until the lender has reimbursed the initial fee.
It should also be remembered that some initial fee lenders require approval before proceeding. This may slow down the process somewhat and should therefore be factored into the schedule.

The benefits of bridging loans

The main benefit of any type of bridging loan is the speed with which it can be completed. As long as everything is in place, it is not uncommon for funds to be released in as little as three to four business days. This really sets bridging lenders apart from their high street counterparts while allowing for a greater degree of flexibility, including who they lend to.

This element of flexibility also extends to the life of a loan, as many lenders are reluctant to impose prepayment fees or penalties on those who exit early. This helps give more power to the borrower.

While it’s impossible to predict what will happen next in the economy, bridging finance remains a powerful tool for those looking to use a property to free up equity. While there will undoubtedly be some slowdown in the real estate market, bridging lenders remain committed to providing brokers and borrowers alike with the best possible terms.

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