The past, present and future of bridging

There’s no doubt that we faced a challenging year in 2022. Rising interest rates, a cost-of-living crisis and political instability put the wider economy under pressure. The property industry was not immune to this; mainstream lenders struggled to lend, while many borrowers faced fresh affordability issues.

But, despite the negative sentiment, the bridging market went from strength to strength over the review period. According to the latest Bridging Trends data, demand for bridging finance increased to the highest figure since 2019, as £716.2 million of bridging loans were transacted in 2022.  Borrowers now recognise the crucial role specialist finance plays when difficulties emerge in the wider market. While high-street banks shied away from the challenges, bridging companies emerged to support property investors.

A good year for bridging

As we enter the second quarter of 2023, optimism is growing amongst lenders. The desire to purchase property has not disappeared; borrowers are still continuously looking at how they can maximise profits from property.

John Hardman, Managing Director of Fluent’s bridging division, shared his thoughts on the growing popularity of bridging finance.

He added “The short-term market has proven to be quite resilient and has certainly weathered the economic storm. Rising interest rates, the cost-of-living crisis and even a war has failed to dampen the appetite for short term property funding and I’m delighted with how my team continue to exceed expectations.

Bridging loans have leapt further into the spotlight over the past few years, having moved from a niche product offering to becoming far more mainstream. While bridging finance is most commonly used by those that need fast funding for their property venture, people are increasingly recognising that a bridging loan can be used for wide-ranging financial requirements.

Last year for example, we facilitated funding for a whole host of circumstances; from a bridging loan to help pay overdue care home fees for a client’s elderly parents, to assisting a non-UK resident with funding for a new business venture abroad. No matter how complex the case, we pride ourselves on reacting quickly to provide bespoke, well-constructed bridging solutions perfectly tailored to each applicant.”

The benefits of a bridging loan

Put simply, a bridging loan is a type of short-term financing and can be used to fund a wide range of activities. Essentially, it is a loan that is taken out to “bridge” the gap between two financing events, such as the purchase of a property or the completion of a longer-term financing arrangement.

Flexible terms

While bridging loan terms will vary from lender to lender, one of the key advantages of this loan type for businesses is its flexibility. Unlike longer-term financing arrangements, bridging finance can be tailored to the specific needs of the individual, providing funds quickly and at short notice.

This can be particularly useful in circumstances which require a quick response to changing market conditions or unexpected events. In these situations, securing a bridging loan quickly really can make all the difference to the success or failure of a project.

Diverse security

Another advantage of bridging finance is that it is generally easier to obtain than longer-term financing arrangements. This is because the loan is secured against an asset, such as property, which provides a degree of security for the lender. This means that those clients with less-than-perfect credit histories, or limited financial track records, may still be able to access bridging finance, provided they have sufficient collateral to secure the loan.

Wider lending criteria

While a standard mortgage requires excellent credit and a habitable property as security, bridging loans are often considered on the projects’ profitability, exit strategy and the borrowers’ overall experience in the industry.

Every lenders’ criteria will vary, but in general, bridging lenders are not overly concerned with income, affordability and credit history. Instead, their concern is largely based upon individual success of the project.  This is what we call their exit strategy.

Factors to consider

As with all finance solutions, while there are lots of benefits, there are also risks to be aware of. If you’re considering a bridging loan for your client, here are some factors to consider:

Higher interest rates

Firstly, the interest rates on bridging loans can be relatively high compared to other forms of financing. This is because bridging finance is seen as a higher-risk lending option, due to its short-term nature, and the potential for unexpected events to impact the borrower’s ability to repay the loan.

Shorter repayment window

Your client will need to be aware that they will need to repay the loan in full within a relatively short timeframe. Typically, bridging loans are repaid within 12 months, which can put pressure on businesses to generate sufficient cash flow to meet the repayment schedule. If the loan is not repaid on time, the lender may take possession of the secured asset, which could of course, have serious implications for your client and their business.

Our thoughts on bridging trends in 2023

There’s no doubt that bridging is very much a diverse and growing area in financial services, having evolved and developed immensely over the last decade. The healthy increase in borrowing during periods of economic uncertainty, confirms what we already know – that the bridging finance market has matured and is here to stay. While we’ll never be able to fully predict everything that lies ahead, what factors could force change within the market in 2023?

Continued affordability challenges

We expect that like last year, 2023 will also have its challenges, but the mood in the market seems hugely positive. We expect that lenders will continue to adopt a ‘keep calm and carry on mentality’, adapting to things like costs of funds available. With continued affordability challenges for borrowers, the use of regulated bridging to fund onward purchases (before their current home is sold) will remain a viable option this year.

Housing stock

Already, the bridging market is seeing increased demand from landlords and property developers for bridging finance, used to acquire and develop properties either for sale, or to retain in their portfolio. Indeed, demand in the rental market is outpacing supply, due to the lack of properties being built. And as the housing market continues to see an increase in demand for private buy-to-lets, now could be a great time for new entrants, meaning the need for bridging is going to be more important than ever this year. 

EPC compliance

Another hot topic to consider is the new proposed government regulation which requires landlords to make changes to their properties in order to meet an EPC rating of ‘C’ or above by 2025, before any new tenancies can be agreed. Many landlords, however, are uncertain of the amount they will need to spend to improve their properties, with more than two fifths (44%) stating that affordability is the main barrier for them in making their properties more energy efficient ahead of the implementation date (Financial Reporter, 2023).

With the proposed deadline fast approaching, landlords have just two years to complete required improvements to their properties. With most landlords expected to need to make property improvements, a bridging loan could help to provide a quick cash injection to fund changes in the short term – allowing them to leverage the funds in a variety of ways, and at different stages of the property cycle.

While bridging trends in 2023 will of course be swayed by the market and wider economic climate, uncertainty still abounds. But here at Fluent, we vow to provide speed, flexibility, and commitment for you and your clients, no matter how complex the case.

If you are considering a bridging loan for your client, why not try our bridging calculator to get an instant detailed quote today? For any other enquiries, please don’t hesitate to get in touch with our broker team.