The demand for bridging loans is growing rapidly. Annual lending in the sector is estimated to total around £2.5 bn and is growing at 25 per cent a year. As loans are repaid so quickly, outstanding balances total around £1.2bn, little more than one-tenth of 1 per cent of total mortgage balances.
Specialist bridging lenders control around 65 per cent of the market, up from 20 per cent in 2000. The rest comes from high-street banks.
When to use bridging loans
The firm’s customers use bridging loans for a wide variety of reasons, including meeting a deadline to buy because the lender has let the buyer down at the last minute, borrowing against actual market value rather than a discounted purchase price, releasing cash quickly without being tied into a long-term mortgage; and staying in a house while refurbishing a new property.
Many people are stuck in a time warp when they think of bridging. There is an out-of-date perception it is a distress product. Bridging is short-term specialist finance that is used mostly by relatively affluent individuals who want to take advantage of investment opportunities within restricted timeframes.
One of the key factors is that mortgage lenders tend to turn round applications in weeks while a customer can get a bridging loan in a matter of hours. To use a postal analogy, lenders often provide a Fedex-type service, where for a premium above standard mail, delivery is guaranteed.
Borrowers will usually pay monthly interest of at least 1per cent. Inevitably, a largely unregulated, short term, high interest loan market has attracted some concerns about consumer welfare.
Bridging loans a viable funding solution.
Bridging finance has a place in the market as long as the costs are fully understood and there is a viable plan for paying off the loan quickly.
But some firms have given bridging finance a poor image. This has led reputable providers to push for a voluntary code to raise standards to a minimum benchmark. The FSA regulates relatively few firms and attempts by some providers to form trade associations have failed. This was largely due to the lack of widespread willingness to accept a code of conduct.
Efforts have been made by companies to draft a code. The code would include a minimum term of no longer than one month, all fees to be clearly stated at the outset so that customers and brokers can make fair comparisons, fees to intermediaries and packagers to be within reasonable levels and to be clearly advised to borrowers and the existence of a plausible exit strategy from the bridging loan at the outset, with finance not available to borrowers who have no prospect of repaying the loan within a year.
There is no doubt the bridging loans market is in a state of flux. One of the most significant trends is the move towards automatic valuation modelling, with borrowers increasingly demanding faster turn-rounds. Instead of five or six days, they want a bridge in place within a day or two.
If you would like to know more about bridging loans or see if they are right for you please look at our bridging finance pages with the link provided.