How can bridging loans be utilised in the current market?

An overview of bridging

Bridging loans are short-term loans, generally up to a maximum term of 24 months, which are secured against property and give a client access to funding efficiently. As well as speed, one reason for their popularity is how flexible they can be. A good lender will ensure that the terms of a bridging loan best suit the borrower and their transactional needs. They will also assess each enquiry on a case-by-case basis. The fact that property is offered as security allows lenders like MT Finance to consider each case’s merits and take a common-sense approach to the transaction. The borrower’s future plans – including their exit strategy – will help to inform that decision. This applies to both regulated and unregulated bridging loans, although the exact criteria for each is likely to differ.

Historically associated with property purchases and preventing chain breaks, bridging loans also have a multitude of other uses. I’ll be breaking down some of their many uses, and also explain why they’re so versatile in the current climate.

Type of bridging loans

Property purchase

Often viewed as the bread and butter of bridging, property purchase bridging loans gained renewed attention in the wake of the pandemic and the subsequent stamp duty-induced property boom. With demand far exceeding supply, borrowers who had quick access to funds found themselves able to compete with cash buyers. While the recent interest rate rises implemented by the Bank of England are widely expected to slow down the market – in fact in July, Halifax reported the first price fall in over 12 months, although average prices only fell by 0.1% - we are still seeing high levels of demand. In fact, Zoopla reported in August that the demand for housing was still 25% above the five-year average.

While borrowers are undoubtedly going to be increasingly cautious when it comes to affordability – particularly amidst the cost of living increases we are seeing – the high demand we’re continuing to see makes it relatively unlikely that the housing market will crash. Instead, having quick access to funds will continue to place borrowers ahead of the competition.

Chain break

According to Bridging Trends - a quarterly infographic developed by MT Finance as a method for monitoring the latest trends in short-term bridging finance lending in the UK – funding a chain break was the second most popular use of a bridging loan in the second quarter of 2022, just behind purchasing an investment property. It could be that a borrower’s mortgage application is taking too long, or the sale of an existing asset will not complete in time. With almost two fifths of UK home buyers losing out on a property purchase due to mortgage delays, we are increasingly seeing the importance of a borrower being able to move quickly when it comes to finances.

Light and heavy refurbs

Reasons for undertaking a refurb vary massively. For investors or landlords, it can be a way of improving a property and helping to achieve the highest possible yield. As rental properties remain sought-after – Rightmove recently reported there are triple the number of prospective tenants compared to available properties – this provides an opportunity for landlords keen to maximise their returns while also helping to cover a potential rental void.

While a heavy refurb may not be the preferred option to achieve maximum rent due to the cost of materials and an ongoing labour shortage, a light refurb could help to improve the general feel of a property without incurring large bills. It is also likely to take less time, which is good news for maintaining a regular rental income.

In the regulated bridging sector, we have seen an increasing number of borrowers looking to unlock equity in their homes to fund a renovation. Often utilised in a bid to maximise space, it can negate the need to move house.

How refurbs are funded varies. While some borrowers will take out a first charge bridging loan with the aim of repaying it via remortgaging at the asset’s higher value, others will look to refinance and unlock equity already in the property. In fact, Bridging Trends reported that in the second quarter of 2022, the type of bridging loan with the biggest increase in use was regulated refinance, jumping form 5% in Q1 to 10%. Unregulated refinance saw a more modest rise, going from 9% in Q1 to 11% in Q2.

Auction purchases

Property auctions have become increasingly accessible since the start of the pandemic. After initially going online, many have elected to stay there, despite the dropping of restrictions. This has increased the accessibility of auctions, enabling buyers to bid on properties hundreds – if not thousands – of miles away. Yet the challenge to fund these purchases remains. Winning bidders generally need to pay an initial 10% deposit with completion required after only 28 days. If the bidder is not a cash buyer, a bridging loan can be one of the most flexible options to secure the purchase.

Auction properties are often in need of some form of refurb and a bridging loan can also help to cover the cost of this. This will enable the borrower to either sell the property on at a higher price or remortgage against its increased value. Either outcome would allow them to repay their bridging loan.

Business purposes

While business owners and SMEs seem understandably wary of investing capital in such an unpredictable economic climate, there is still an appetite for business funding, albeit smaller than previous years. In fact, government statistics show that between April and June 2022, the number of incorporations increased by 5.5% year on year while the total register increased by 1%. For those who are looking for funding solutions, bridging can be an attractive proposition due to the speed at which liquidity can be provided. As with property purchases, many lenders – including MT Finance – won’t require evidence of trading history, accounts, or proof of income. Uses include purchasing new premises, acquiring stock, a capital injection, or funds to facilitate a new venture.

Second charges

A way of securing finances against a property that has a mortgage, second charge bridging loans can be used for a number of different reasons including purchasing an investment property, redeveloping a property or expanding a business. Interest rates will tend to be slightly higher for second charges which reflects the risks a lender takes. If something goes wrong, they won’t receive their repayment until the first charge lender has been reimbursed.
It’s also worth remembering that some first charge lenders will need to grant permission before it can go ahead. This has the potential to slow down proceedings slightly so should be factored into the timeline.

The benefits of bridging loans

The main benefit of any type of bridging loan is the speed at which it can be completed. As long as everything is in place, it isn’t unheard of for funds to be released in as little as three to four working days. This really sets bridging lenders apart from their high street counterparts, while also offering an increased level of flexibility, including who they lend to.

This element of flexibility also stretches to the term of a loan, with many lenders declining to levy early repayment charges or financial penalties on those who exit early. This helps to 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 who are looking to leverage a property to unlock equity. While there will undoubtedly be some form of slowdown in the property market, bridging lenders remain committed to delivering the best possible terms for brokers and borrowers alike.