A bridging loan is financing that addresses a borrower’s short-term needs. Such loans have grown in popularity and scope in recent years, that bridging has become a buzzword in the finance industry. But, how did bridging loans become so popular as to spawn such a relentless industry? What is responsible for this inexorable growth that has surpassed every measure of expectation?
Some history on the origins of the bridging loan market is helpful. Only in its infancy two decades ago, with a small number of lenders in a tiny niche market, the market has surpassed all recognition. Short-term finance was available in the 1960’s and bore some semblance to today’s bridging loans but this was only available through high street banks and building societies. Qualified recipients were those known to these operators.
The 2008 credit crunch was the element that catapulted the bridging market to reckoning again. How? Well, the big traditional lenders – HSBC, Barclays, Lloyds TSB, RBS Nat West – along with a host of other big-name financiers, grew in their reluctance to lend. As necessities is the mother of invention, customers quickly opted for lending alternatives in the face of enhanced lending requirements by these conventional players. Enter bridging lenders. They noticed a gap in the market that bridging finance had the potential to meet and wasted no time in grabbing with both hands.
Bridging offered an alternative so purchases could proceed and sales chains maintained, since property chains had started to fall through due to some party’s inability to obtain a mortgage. The credit crunch also meant great property bargains became available and potential investors could take advantage of such opportunities using bridging loans.
Speed and a common-sense approach to lending requirements were elements that established lenders could not quite replicate or respond to. Bridging ensured that people could even buy up properties in need of renovation to make them habitable, where traditional mortgage funding was inaccessible.
Bridging finance is almost easy money. Growing demand showed the need for more lenders, who duly came on board, further strengthening the credibility of the bridging industry. This remains the defining era of the bridging loans market, as we know it today. New lenders entered the market every single month, a trend that has yet to abate.
The attractive short-term returns on bridging investments must be mentioned. In fact, this factor alone – the potential to earn upwards of 18% per transaction compared with an average 1% – drew in a wave of investors that supported the growth of the sector.
Many of the new entrants homed in on unregulated business – mostly commercial lending – contributing significant numbers to those involved with residential properties for selling or rent.
Benson Hersch, CEO of the Association of Short Term Lenders (ASTL), shares that annual bridging completions by ASTL members alone stood at £2.8 billion as against only £474 million nationally in 2011. This figure represents only around 65% of the market, putting the UK bridging market north of £4 billion.
Bridging loans have since expanded beyond being just for homeowners needing to complete one purchase of a home before selling their present one. Developers use bridging loans more often now and they vitally finance buying or refurbishing of rental property. Inheritance tax bills to release the estate where there is no other short term cash available now even rely on bridging finance. With an increasing number of ways to employ and apply bridging loans, there will likely not be a shortage for loan requests.
2014 saw the introduction of strict mortgage lending rules that hoped to stall irresponsible lending and consider how applicants would really cope were rates to spike. Customers could barely access traditional mortgages. Again, the bridging loans industry saw another inevitable surge in lenders and liquidity. Those seeking alternative finance options had even more than they could ever bargain for.
It is true that bridging finance is often expensive with a higher risk factor. There are however an increasing range of products available guaranteeing cheaper rates, and the market continues to march on in ground and reputation. Becoming more and more mainstream with competitive products means the bridging finance industry has indeed come to stay.