What Is a bridging loan?

A bridging loan is a short-term loan which individuals or companies can use until they secure longer term financing or settle an existing obligation. It allows the borrower to meet current cash flow needs by providing immediate cash flow. Bridging loans are short-term (normally up to one year), have relatively high interest rates, and are usually backed by some form of collateral, such as real estate.

Bridging loans vs. traditional loans

Bridging loans normally have a faster application, approval, and funding process than traditional loans. It is due to this convenience that bridging loans have relatively short terms, high interest rates, and higher origination fees. Mostly, borrowers accept these terms because they require fast, convenient access to funds. They are willing to pay high interest rates because they know the loan is short-term and plan to pay it off with lower interest, long-term refinancing or via the sale of the underlying asset that is being used as collateral. Additionally, some bridging loans do not have repayment penalties which traditional loans may have.

Difference between commercial and residential bridging Loans

A commercial bridge is secured against commercial properties, which are typically considered for purposes such as retail, office, and industrial use (among other things). A residential bridge is secured against residential properties.

Regulated and unregulated bridging loans

A regulated bridging loan when the borrower is buying a property to live in (or for a family member to live in).

An unregulated bridging loan is when the borrower is purchasing or refinancing a property as an investment, not as their home.

Bridging loans are available on a first or second charge basis. However, regulated bridging loans are always a first charge loan.

Loans provided to borrowers through LandlordInvest are provided solely for business purposes. Loans are therefore not regulated by the Financial Services and Markets Act 2000 or the Consumer Credit Act 1974. You should seek independent legal advice if you are in any doubt as to the consequences of the loan not being a regulated agreement under those Acts.

When could a residential bridging loan be used?

A bridging loan can be used for a wide variety of purposes, including:

• Auction purchases - fast completions allow the borrower to complete the transaction in the required time frame
• Planning applications/change of use - used to maximise property value and income
• Chain breaking mortgage - enables a borrower to progress a purchase before completing a sale on their existing property
• Releasing cash from probate on an inherited property - so that the property can be sold
• Refurbishing - to maximise rental income
• Purchase at undervalue - allowing the borrower to capitalise on a one-off opportunity.

The bridging loan market

Almost every branch of the financial services sector in the UK was adversely affected by COVID-19 in 2020. The bridging finance sector was no exception, which fell by around £277.7 million compared to 2019. In total, the value of bridging loans provided stood at £455 million in 2020, down from the £732.7 million in 2019, a 38% decrease YoY. The bridging loan market held steady in Q2 2021 at £146.52 million, a nominal percentage rise on the previous quarter (£144.51m).

According to Ernst & Young's bridging market study for 2021, 34% of respondents believe the average loan size in the market is £500k or more. This is a decrease from 39% of respondents who shared this view in 2020, and 61% in 2019.

The majority of respondents (54%) view the 'average loan term' to be between 9-12 months which is broadly in line with both the 2020 survey (59%) and the 2019 survey (60%). Additionally, the majority (63%) of respondents believed that the average monthly interest rate for bridging loans is between 0.75% - 1.00%, largely unchanged since 2019 and 2020.