Bridging as a type of lending in the UK begun in the 1960s and it was mainly provided by the high street banks.
Predominantly the purpose of bridging loans was to fund house purchases, basically to bridge the gap between a house purchase and a house sale and was considered as something of a last resort.
An event that triggered the development and need for bridging was the introduction of the Assured Shorthold Tenancy (AST) by the Housing Act of 1988. The AST is the most common form of arrangement that involves a private residential landlord, with limited security of tenure for the tenant. This fact had made the buy-to-let investment much more attractive and it created the need for fast and flexible financial solutions
Experienced investors and first-time buyers needed fast cash to fund an auction purchase where they had to complete within a month from exchange, as well as flexibility from the lender to fund a refurbishment / reconfiguration of an already owned property to turn it into a viable rental property. With the completion of the works they would refinance with alternative finance to a longer term buy-to-let or commercial mortgage. Essentially Bridging finance provided a much quicker solution than a commercial mortgage or business loan.
Another event that had an impact on the bridging industry was the credit crisis in 2007 during which many lenders faced problems and withdrew and even High Street banks left the sector. This acted as an opportunity for some specialist lenders to secure an increased share of the bridging market. At the same time new entrants brought increased competition and pushed down prices. Falling prices in addition to speed made the bridging product more attractive to brokers and borrowers.
All these developments created the pressure for the introduction of professional standards. A major change to the industry was brought in March 2016, when the Mortgage Credit Directive came into force introducing additional transparency and standardization of information. This change had to do with the distinction between regulated and unregulated mortgage contracts. A Regulated Mortgage Contract is defined as any loan secured on a property occupied by the borrower or a related person and is not for business purposes. On the other hand, an Unregulated Contract is any loan for business purposes secured over an investment property occupied by third parties unrelated to the borrower.
Gradually, bridging has grown and has become a popular funding solution which can be adapted to the specific needs of each client. A bridging loan because of speed of execution and flexibility as compared to high street lenders, can be granted to fund an auction purchase of an investment property, to fund a refurbishment of an investment property, to raise capital on an investment property for business purposes or just to refinance an existing loan to give the client time to sell or refinance to a longer term loan.
Today, the majority of bridging loans are unregulated. Regulated loans account for less than 15% of the market. According to a UK Bridging Market Study in April 2021, during the last year refurbishment and investment property purchase are the most popular reason for bridging.
It has to be noted that bridging follows the same principles as any other loans and lenders like London Credit follow strict rules and procedures in relation to AML, customer onboarding and KYC, responsible lending, credit and other checks including fraud.
In bridging, the security property is of utmost importance as it will determine the viability of the exit strategy. Bridging is basically a temporary financing solution while transitioning to another financial arrangement, hence the name. In most of the cases interest in a bridging loan is retained and so the borrower does not have the obligation to make any payments during the term of the loan.
The unfortunate situation with the COVID-19 pandemic introduced significant short-term challenges for the UK bridging finance market. The immediate effect was that several lenders paused on new loan origination. The main reason for that was the restrictions on property viewings because of the lockdown which also put a pause on valuations as valuers could not inspect the properties. As a result, at least during the lockdown the number of completions of property transactions was reduced significantly.
COVID-19 also provided the opportunity to test how safe the London Credit Loans are. It’s worth noting that during the UK lockdown, London Credit has auctioned several security properties to recover their respective loans and has recovered all the loan principal and interest due for all the enforced loans, achieving 100% collection rate
With the London Property Market re-activation, the demand for bridging loans is increasing and with the corrected property prices, bridging loans are increasingly attractive for both lenders and their investors. Bridging completions are increasing by more than 20% per quarter reaching and exceeding the pre pandemic levels. A study from the property group JLL indicates that there is increased demand for properties in the capital after the height of the pandemic and combined with the return of the overseas buyer, will boost the London housing and bridging market over the next five years. JLL predicts prices in London will rise 24.5% by 2026.
These bridging loans provide asset secured fixed income for the investors in an environment of volatility and in the absence of any other attractive safe fixed income investment alternatives.
Credit Manager, London Credit