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Bridging loans - the basics

POSTED: 20th February 2014
IN: Guides
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During the credit crunch and the recession, banks and finance providers took a cautious approach to lending, meaning borrowers found it more difficult to obtain mortgages and other forms of credit.

During the credit crunch and the recession, banks and finance providers took a cautious approach to lending, meaning borrowers found it more difficult to obtain mortgages and other forms of credit.

However, one type of finance that experienced growth during the economic downturn was the bridging loan.

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A report published by the Guardian in November 2011 - when the UK economy was still struggling to shake off the recession - noted that this 'often-overlooked corner' of the lending market was 'booming', while more recent figures suggest that bridging lending has just reached a record high.

Read on to find out more about bridging loans, how they work, their advantages and their drawbacks.

What are bridging loans?

Bridging loans are a source of short-term finance predominantly used in the property market.

As the name suggests, they serve as a 'bridge' during a period when cash or credit is in short supply, often providing a lifeline for people eager to make sure that a house sale is not scuppered by problems with finances or the timing of the transaction.

One of the most common uses of these loans is to help someone buy their next property before the sale of their current home has been finalised. They can also come in useful for people buying property at auction who need a quick financial solution, and sellers hoping to move on promptly after renovating a house.

According to financial comparison website Moneysupermarket.com, bridging loans can be 'invaluable in facilitating a property purchase that otherwise would not be possible'. The site also stresses that these products are not without their drawbacks, a point we will return to shortly.

The loans are available from a range of sources, from small 'one-man band' lenders to larger organisations that are regulated by the Financial Conduct Authority (FCA), which is taking over from the Office of Fair Trading as the the regulator for the consumer credit industry. This will cover hire purchase, credit card issuers, payday loan companies, pawnbrokers, debt management and collection firms and providers of debt advice.

As such, going to an FCA-regulated broker will mean you will only be advised to take out bridging finance if it is suitable for you and your circumstances.

What should applicants be aware of?

The key factor to be aware of when applying for a bridging loan is the cost, compared to longer-term solutions such as mortgages. Like most short-term financial solutions, they're not cheap.

Interest rates can be much higher than on an ordinary loan and borrowers could also have to pay administration fees. The rate could run as high as 1.5 per cent a month, or 18 per cent over the course of a year, according to Moneysupermarket.com.

While bridging finance has become an increasingly common option in recent years, the Council of Mortgage Lenders warned that it is 'clearly not the answer to anything other than a minority of financial problems'.

Melanie Bien of mortgage broker Private Finance pointed out that one of the greatest dangers is not having a credible exit strategy, such as having a guaranteed buyer lined up for your own property, or having a long-term solution to finance, such as a mortgage.

What does the future hold?

West One Loans, a specialist provider of bridging finance, has predicted that this sort of lending will continue to grow and evolve in 2014.

The company released figures showing that bridging loans reached a gross value of £2 billion in the UK during the 12 months up to the start of January this year.

This marks an increase of 3.3 per cent from the annual figure recorded in November and is a new lending record for the sector.

Duncan Kreeger of West One Loans said that, with economic progress feeling "more solid by the week", firms and individuals can look forward to "a year of great opportunity".

He added: "Bridging has grown up from the industry it once was, and it's still evolving in 2014. Lenders are expanding and opening their doors to different types of borrower.

"An economy on the move needs rapid finance that can really get projects started and short-term secured lending is moving to fill that gap."

Bridging loans can prove highly useful for companies, investors and individuals, but should never be entered into without careful research, planning and consideration of the risks.

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  • Bridging Finance
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