What is bridging finance?
Bridging finance is a type of short-term loan that usually lasts 12 to 18 months and can be used for a variety of purposes until a longer term source of funding is secured. A common example would be waiting for the sale of a property to go through.
Research shows that the bridging loan sector has continued to perform well in the period to June 2022. There has been a total of £178.4m in loans in the latest quarter which is up 14% on the previous quarter and 22% more than in the same period last year.
The most popular use of bridging finance is purchasing an investment property in the latest quarter, accounting for 24% of total transactions, slightly down from 26% in the prior period. Following closely behind at 21% is using the finance to “chain break” (i.e. break the chain you are in order to complete the purchase of a new home before the sale on your current house is completed).
There is continued pressure on buyers, with a lack of housing stock leading to multiple purchasers competing for the same property. This means that buyers often need to move fast to complete purchases. The use of a https://www.parachutelaw.co.uk/bridging-loan bridging loan can help those who are not cash buyers beat the competition and secure their desired property without waiting for a mortgage to be agreed or another house sale to complete. This is further demonstrated by the increase in the use of bridging loans for auction purchases, which has increased from 2% in the last quarter to 4% in the latest quarter.
The biggest jump in the use of bridging finance, however, has been for those using it to refinance. As more homeowners are seeking to enhance their properties rather than move, there is more demand for this type of funding which now represents 10% of all transactions compared to 5% in the prior quarter.
The increased appetite for bridging finance has resulted in competition between lenders ramping up as customers search for the best rates. In Q2 the average monthly interest rate fell to 0.69%, which is down from a previous record in Q1 of 0.71% – good news for borrowers. The typical LTV also improved for borrowers, moving from 56.1% to 54.5% in Q2, giving borrowers slightly more room for movement.
Regulated loans accounted for 43.3% of the market in Q2, representing a slight reduction from 43.9% in Q1.
Other points to note are the average term of a bridging loan has stayed at 12 months in the latest period, which is considered typical for the sector. On the other hand, the proportion of financing for second charge loans has increased in Q2 at 16%, up from 12% in Q1. The majority of loans are on a first charge basis which again is typical for the sector as there are fewer options for those wishing to register a second charge in comparison with lending on a first charge basis.
Final note
The increased activity for this type of financing highlights a number of market factors but is seen to be most reflective of the level of suitable housing stock available to purchasers.
With more and more competition between buyers, obtaining bridging finance is one way to stay ahead of the competition. Having access to the funds before selling an existing property means that buyers can move quickly and be on level footing with cash buyers. However, if you are considering this type of financing, do be aware of all the terms and conditions before taking the plunge.