When the credit crunch took a full grip on the financial sector, a mass exodus from the secured credit market took place. With higher risks, unbalanced books and rock bottom interest rates, many lenders exited the market in a search for less risky and more lucrative business opportunities.
A huge hole was left in the market; credit had never been so cheap, but rates of approval for mortgages and loans were at rock bottom. In the UK in 2012, new mortgage lending plummeted to a third of those approved in 2007.
Typically, bridging finance is a high amount short term loan usually borrowed from anywhere between one day to a year. For the most part they are used in property. For example, if you had agreed to make payment for a new property on a specified day, and you are expecting to have received the funds from your buyer, but they have delayed payment for a week.
This is likely to be very stressful, especially if you are in a chain and are under pressure to make the payment.
Bridging loans allows the buyer to avoid expensive legal costs and possibly longer term implications, and often works out as the less expensive option if only for a matter of weeks. The amount you can borrow very much depends on Loan to Value (LTV) ratio, with the majority of bridging lenders loaning up to 80% LTV.
As the mortgage industry was struggling in an imperfect property market, first time buyers continued struggling to get on the housing ladder. This has driven rental prices up, allowing an increase in the buy-to-let market.
The market started to expand when many people saw a use for this kind of loan; more and more bridging firms entered the market, especially during the credit crunch. When investors started to see inflation wiping out any interest they were making in traditional ISA’s and savings accounts, they began to look elsewhere.
As the property market boomed, investors flocked to the high levels of interest offered by the bridging loan firms who had spotted a gap in the market, and were attempting to make the property market a lot more fluid and perfect.
With more firms came more competition. This, accompanied by cheap credit has led to rates of interest charged on bridging loans to fall. The usual rate of interest in the UK is anywhere between 6 and 18% APR.
Many bridging loan providers offer a personal service, looking at your current financial situation and allowing you to work together to ensure the loan is the correct way to raise finance at that particular time. For a low risk individual with four properties all paid for, you are likely to get a very good rate for a short term bridging loan. However, someone with only 1 house without a credible exit plan is likely to see higher rates of interest, if the loan will be made at all.
Where bridging finance really comes into its own is property development and property portfolios. It is difficult to get a mortgage when a house is in a state of disrepair, even in a high yielding area. A bridging loan allows you to buy a worn down property, with money borrowed on another property you own. You can then use this money to repair the house, and find a more traditional financing method, such as a buy-to-let mortgage.
It cannot be emphasised enough how important having a realistic exit strategy is. If you are using the bridging loan to cover a gap in finance, but are still expecting to receive the money either in form of a mortgage or payment from the buyer of your house, this is a closed bridging loan, and a clear exit strategy is in place.
If you have found a house that you would like to move into, but have not yet found a buyer for your current house, a bridging loan is still a possibility. The loan may be based on the equity within your new house, but it will more than likely have some equity in your old house too. You should think very carefully about how long you would like the loan for, ensuring you have planned for the time it will take to sell, and for your buyer to get a mortgage.
Remember, banks are not as keen to lend as they once were to give you a mortgage, so ensure that you plan for contingencies and that your bridging lender is open to an extension of the loan.