The latest research by Revolution Brokers reveals that in Q1 2020, at the very start of the pandemic, total bridging loan lending in the UK totalled £122.9 million. As the pandemic tightened its grip, quarterly totals plummeted significantly, falling as low as £79.4 million in Q2 2020.
However, as the government started to introduce homebuying incentives such as the SDLT holiday, market activity skyrocketed and bridge lending increased steadily.
By Q1 2022, bridging loans totalled £156.8 million, an increase of 28% since the start of the pandemic.
What is a bridging loan?
Bridging loans are short-term loans often used to bridge the gap between buying one property and selling another.
Many home buyers rely on the funds from selling their current home to pay for their new home but, often, they’ll have to buy the new home before completing the sale of their current one. This means they require a short-term loan to enable the purchase.
Bridging loans can be arranged very quickly in the case of an emergency but must be secured against an asset which, in the vast majority of cases, means a property.
Most common reasons for taking out a bridging loan
The most common reason someone might take out a bridging loan is that the property chain they are part of has collapsed, putting their opportunity to purchase their dream home at risk. A bridging loan helps them secure the purchase while waiting for their current home to sell.
Bridging loans are also common with auction purchases. When buying a home at auction, the buyer has very little time, usually around four weeks, to come up with the money. A bridging loan is often required.
Benefits of a bridging loan
Quick borrowing means that a property purchase transaction can stay on track even if outside influencers mean the buyer doesn’t have immediate access to the funds they were expecting.
Furthermore, it’s possible to borrow large sums of money - enough to buy a home! That’s why auction buyers often rely on bridging loans. It’s also possible to secure these large loans against a property which isn’t always possible through high street lenders.
While most people will want to pay off their bridging loan very quickly, repayment terms can be flexible, working around the specific circumstances of the borrower.
Challenges of a bridging loan
There are also important considerations to make before taking out a bridging loan.
First and foremost, the fact it’s a secured loan means there is a risk of losing the asset the loan is secured against if, for whatever reason, the loan cannot be repaid in the agreed timeframe.
Bridging loans can be taken out very quickly and for large amounts of money, but in exchange for this convenience, they often come with a premium in the form of higher than average interest rates.
Lastly, as well as the high-interest rates, bridging loans can come with a range of add-on fees which increase their overall expense.
So why are bridging loans increasing?
The most simple explanation for why bridging loans have been increasing since the start of the pandemic is because the housing market has been getting increasingly busy.
As more and more people try to buy homes, chains get longer which makes sales more precarious, and professionals, such as agents and conveyancers, get busier which results in transactions taking longer to complete.
This means more buyers find their preferred timelines getting thrown out of whack thus resulting in the need for emergency, short-term loans to help them stay in the market while the transaction works itself out.
Almas Uddin, Founding Director of Revolution Brokers, commented: “The government very intentionally made it hard for prospective buyers to resist getting involved with the property market during the pandemic. Significant tax breaks caused many to think it was an opportunity too good to refuse and so market activity boomed. It’s natural for this to result in more and more people needing short-term loans in order to stay afloat when processes get delayed.
"But interest rates are on the rise and don’t look like they’re going to slow down any time soon. This means the already high rates associated with bridging loans are going to become even more expensive. Therefore, it’s vital that when looking at bridging finance, you get a comprehensive view of what’s available to suit your individual situation.”
