The UK’s specialist lending market is full of products designed to help brokers and borrowers resolve non-conventional cases. Populated by lenders who are able to structure loans specific to the needs of individual enquiries, specialist finance has been rising in popularity since the global financial crisis.
Of the specialist finance products available, bridging loans are one of the most popular. It is estimated that the bridging finance market is currently worth in excess of £4 billion. And while traditionally considered a last resort for buyers in need of quick finance, bridging loans are now a viable finance solution for individual investors through to businesses and property developers.
What are bridging loans?
Bridging loans are a short-term form of finance. They are used by those in need of finance to quickly complete on a property purchase or business investment. As the name suggests, these loans act as a temporary finance solution (or bridge) for an individual until they seek permanent funding or release cash by selling an asset. A form of collateral is also used as security, which is typically real estate owned by the borrower or stock inventory.
Using bridging loans to purchase a property
Bridging loans are commonly used to support property transactions. Rising demand for real estate in the UK has made the market extremely competitive. As a result, delays in receiving finance from a mortgage provider can result in a buyer losing out on a property, even after a deposit has been paid.
A 2019 survey by Market Financial Solutions (MFS) revealed that 31% of UK homeowners have been gazumped in the last decade. Two fifths (39%) have also had to pay fees to intermediaries despite not completing on the property purchase in the end.
Bridging loans protect buyers from the above scenarios by ensuring that they have access to the capital needed to complete on a sale. Generally, buyers then have anywhere from three to 18 months to pay off the bridging loan.
Who uses bridging loans?
Unlike mortgages which adhere to stringent and rigid lending criteria, bridging loans are individually tailored to meet the requirements of each individual case. Borrowers can range from buy-to-let landlords to foreign nationals and landlords undertaking renovation works.
Bridging lenders like MFS have immediate access to inhouse credit. This means that funds can be released in a matter of days once the necessary due diligence has been completed. For this reason, bridging finance is ideally positioned to support borrowers purchasing a property at auction or help those planning a quick turnaround on a renovation project.
First charge v. second charge bridging loans
When it comes to secured bridging loans, there are two types available on the market – first charge and second charge loans (click here for a breakdown on the difference between regulated and unregulated bridging loans).
A first charge bridging loan occurs when the loan is being secured against a property which is owned outright by the borrower, or it is being used to repay the mortgage in full. This means that should the borrower fall behind on their repayments; the bridging loan would be repaid first.
A second charge loans occurs when there is already a loan or mortgage listed against the property. This means that if the property was either repossessed or sold, the first charge loan would have to be repaid before the second charge loan.
Tailored finance for all circumstances
The above overview demonstrates why bridging loans are a popular source of finance. They can be deployed quickly and tailored to the need of each individual case.
The impact of the COVID-19 pandemic has also demonstrated the ability of bridging lenders to quickly adapt to changing market conditions. While many of the big banks took their mortgage products off the shelf during lockdown, bridging lenders stepped up to fill the void left by these mainstream lenders.
Over the coming months, we are likely to see an increase in demand for bridging loans. For this reason, it is important that brokers and borrowers are not only aware of the specialist finance solutions available but also understand how they can be creatively used to support property transactions.