A bridging loan is a short-term loan, usually taken out for a maximum of 12 months, but often for a shorter term. It is designed to allow a buyer to make an acquisition without the need to sell an existing asset, either in advance or simultaneously. In most cases, it will either be replaced by a long-term mortgage facility or repaid from the proceeds of a sale.
Market analysis by mortgage broker, Henry Dannell, revealed that in the last quarter, from Q1 2022 to Q2 2022, the total amount lent through bridge loans increased from 156.8 million to £178.4 million, an increase of 13.8%.
Over the past year, loans have grown even more, climbing 21.8% from the first quarter 2021 figure of £144.5m.
However, these increases still leave loan totals of -1.4% behind the figures immediately before the pandemic when in the fourth quarter of 2019 the total was £180.9m.
Lead times in the UK are currently at an all time high, taking an average of 57 days to get a sale on line and contracts signed. This is 4 days longer than the typical wait time for the last quarter; 10 days longer than this time last year, and even 6 days longer than it was just before the pandemic.
As interest rates rise sharply, it appears bridge loan seekers are also making lower deposits, with the average LTV currently standing at 56.1%. This is 1.6% more than the quarter; +1.2% over the year; and 2% more than before the pandemic.
Why do people need bridging loans?
In the second quarter of 2022, the most frequently cited reason for taking out a bridge loan was to finance the purchase of an investment property. This means that the majority of people who take out this type of financing do not do so to finance their own home purchases, but to finance what are likely additional home purchases, which they will rent out in order to generate income. This is the case for 24% of all bridge loan applicants this quarter.
21% of applicants need the loan because they are part of a broken chain, which pushes back their planned purchase schedule and creates the need for a short-term loan to help them.
Meanwhile, 13% of loans have gone to people who need money to carry out major and heavy renovations to a property. Examples may include extensions and loft conversions.
Geoff Garrett, director of Henry Dannell, commented: “An increase in bridging loans does not mean that people are in financial difficulty. These loans are taken out to finance major purchases or investments, but can only be granted to people who can prove that they have larger, longer-term loans, such as a mortgage.
“Instead, an increase in the total of bridge loans indicates that the systems in place are struggling to keep up with demand and cannot keep up with the desired pace of buyers and sellers. The housing market, for example, is moving more slowly than a year ago, or even two or three years ago. At the same time, buyer demand is extraordinarily high and business is booming. This leads to delays in the sale and purchase process, which in turn increases the need for bridging loans.
“However, with the cost of living and interest rates rising so rapidly, expect to see a slight dip in buyer demand and therefore a drop in bridging financing over the next year.”