A bridging loan is a short-term loan, typically taken out for up to 12 months but often for a shorter duration. It is designed to allow a buyer to proceed with an acquisition without the need of selling an existing asset either in advance or concurrently.
In most cases, it will be either replaced by a long-term mortgage facility or repaid from the proceeds of a sale.
Market analysis by mortgage broker, Henry Dannell, found that in the past quarter, Q1 2022 to Q2 2022, the total amount lent through bridging loans has grown from £156.8 million to £178.4 million – an increase of 13.8%.
In the past year, lending has increased, even more, soaring by 21.8% since Q1 2021’s figure of £144.5 million.
However, these increases still leave lending totals -1.4% behind figures immediately prior to the pandemic when, in Q4 2019, the total was £180.9 million.
Completion times in the UK are currently at a high point, taking an average of 57 days to get a sale over the line and contracts signed. This is 4 days longer than the typical waiting time last quarter; 10 days longer than this time last year, and even 6 days longer than it was immediately prior to the pandemic.
As interest rates rise sharply, it appears bridging loan applicants are also putting down lower deposits, with the average LTV currently sitting at 56.1%. This is 1.6% up on the quarter; 1.2% up on the year; and 2% higher than it was before the pandemic.
Why do people need bridging loans?
In Q2 2022, the most common reason cited for taking out a bridging loan was to fund an investment property purchase. This means the majority of people taking out this type of finance aren’t doing so to fund their own home purchases but to fund what are likely additional home purchases, which they will rent out in order to generate income.
This is the case for 24% of all bridging loan applicants in this quarter.
21% of applicants need the loan because they are part of a chain which has broken, thus pushing their expected purchasing timeline off-kilter and creating the need for a short-term loan to tide them over.
Meanwhile, 13% of loans were given to people who need the money in order to make significant, heavy refurbishments to a property. Examples might include extensions and loft conversions.
Geoff Garrett, Director of Henry Dannell said, “An increase in bridging loans does not signify that people are struggling financially. Such loans are taken in order to fund major purchases or investments but can only be granted to people who can prove they have larger, longer-term loans coming their way, such as a mortgage.
“Instead, an increase in bridging loan totals indicates that the systems in place are struggling to keep up with demand and can’t match the desired pace of buyers and sellers.
“The housing market, for example, is moving more slowly than it did a year ago, even two and three years ago. At the same time, buyer demand is extraordinarily high and activity is through the roof. This causes delays in the conveyancing and buying process which, in turn, increases the need for bridging loans.
“However, with the cost of living and interest rates rising so rapidly, one has to expect to see a slight drop off in buyer demand and, therefore, a decline in bridge financing over the next year or so.”