The History Of Bridging Loans

Find out the history of the bridging finance market including its birth, evolution and how the credit crunch impacted bridging lending

What is a bridging loan?

Bridging loans area type of short term loan secured against property or land. Due to their flexibility and speed of completion, they are popular with both homeowners and property investors.

Being short term, i.e. usually up to 18 months, they are used as a stop-gap before a refinance or sale takes place.

The origins of the bridging loan market

The evolution in the 1980s

In the late 1980’s, due to a large gap in the market, more funding lines became available, with the flexibility to lend against transactions other than standard chain break finance.

Buy to let property investors used the product to refurbish properties before letting, or to complete a transaction quickly or finance auction purchases. This was all sparked by the creation of Assured Shorthold Tenancies in the Housing Act of 1988.

The self-certification boom

Although not directly funded through bridge loans, this was a key driver in the next steps for the bridging industry – although very few recognised it at the time.

In the early 2000s, High Street lenders had heavily relaxed their mortgage criteria, this included higher income multiples, self-cert mortgages and lending to customers with heavy adverse credit, such as current mortgage arrears.

As a result of this, mortgage lending increased sharply, creating a dramatic demand for property. In-turn, we saw rapid growth in property prices. Unfortunately, such relaxed lending criteria lead to many people taking out mortgages that ultimately proved to be unaffordable.

When facing financial difficulty, bridge loans came to the fore, with many borrowers taking out bad credit bridging loans while selling their properties.

The impact of the credit crunch on the market

The 2007 credit crunch saw the market grow further still. As high street banks restricted, or even paused mortgage lending, people turned to bridging finance to complete transactions that may have otherwise fallen through.

This was a much-needed time to provide liquidity to a market that was absolutely starved of it. Countless borrowers were able to maintain their place in a property chain due thanks to chain break bridging loans.

On top of this, those who were still in a strong financial position were able to pick up bargain properties at a time when others weren’t willing to commit to purchases or when sales had fallen through.

Moving out of the recession

The market was being choked under the duel impacts of a reluctance to lend by the High Street Banks, and increased regulation which made borrowing more difficult.

With more and more properties flooding the market and house prices falling, investors were keen to snap up properties quickly. This is where bridging finance really came into force.

Here, bridge loans were again key in providing people with an alternative way to secure properties that they were keen to buy.

As mortgage funding became tricky for many, and the application process tightened up, bridging finance allowed property investors to move quickly and acquire bargain properties to add to their portfolio.

The growth of the bridging market and the modern day

Today, all types of short-term finance are extremely popular with homeowners and property investors alike. They’re popular with lenders too, offering far higher return on investment compared to traditional mortgages.

The lure of higher returns lead to a glut of new lenders entering the market and competing for applications. As is always the case, this increased competition held lenders to account – to survive, their service had to improve and the cost of bridging loans reduced.

As the market has evolved, its reputation has improved, with the FCA regulating some loans – known as regulated bridging loans. Improved service, lower rates and fair lending in this area has seen a ripple effect through the unregulated bridging loan and commercial bridging loan markets.

In the current market, interest rates are low & products are flexible, some loans can even complete in a matter of days.

In addition, more and more specialist bridging loan brokers entered the field, offering advice and support to those new to short term finance.

The impact of Covid-19 on bridging finance

The Covid-19 pandemic put the brakes on not only bridging finance, but most other forms of property finance.

It gave the property market uncertainty and as such, most lenders withdrew loan offers already in place. Lenders also reduced LTV’s dramatically which slowed the market right down.

During lockdown, it was difficult to get valuations carried out, and solicitors we’re unable to see clients.

On the back of this, more and more lenders started to explore the option of using automated or desktop valuations, and solicitors were seeing clients on video calls.

This trend seems to have carried on which makes the process much slicker for borrowers. On the back of the pandemic, technology has improved the market.

Bridging and the buy to let market

The buy to let market is thriving with the option of being able to use short term finance to transact.

In particular, properties in need of refurbishment before letting benefit from specialist property refurbishment finance products, to enable landlords to refurbish to demand a higher rent, or to improve the EPC rating.

When the refurbishment is complete, it’s common to take out a buy to let, or HMO mortgage based on the increased value, meaning you can release capital for an onward purchase, allowing you to grow quicker.

With 90% bridging loans available for refurbishment or auction purchases, investors are able to purchase property with little cash input.

In addition, certain locations in the UK, such as London, are popular with both overseas and high net worth (HNW) property investors. When looking at bridging loans London, some funding lines offer specially geared large bridging loans tailored to suit.

The future of bridging loans

The future of bridging certainly looks bright, there’s a vast choice of lenders which naturally means the market is competitive.

With lenders competing for business, due to the way they are funded, not all can complete on rate.

This means that they look for other areas to be competitive, such as slicker joint representation legals, enhanced loan to value ratios, a larger product range and speed of completion, with some completing in a matter of days.

In addition, a whole of market FCA regulated bridging loan broker will be able to compare bridging loan rates for you, and handle the application process, saving you time and money.

Read more: Find out the answer to the question ‘are bridging loans risky?‘