A recent spike in bridging finance activity has seen loan volumes once again come close to pre-pandemic peaks. Even in times of economic uncertainty, bridging finance continues to serve as an affordable and attractive alternative to conventional high-street loans.

Equally, the growing availability of bridging loans is broadening the appeal of responsible short-term borrowing to a more diverse audience than ever before. There are more independent specialists offering bridging loans in the UK than ever before, spurring the kind of competition that has brought average monthly interest rates to all-time lows.

But what are the specific applications that bridging loans are currently being used for? What are the most popular uses for bridging finance in the UK as of Q4 2022?

Investment property purchases

For some time now, the most common application for bridging finance has been purchasing investment properties. Ferocious competition in the UK housing market is prompting more investors than ever before to seek fast-access funding for time-critical property purchase opportunities. Bridging finance provides new and established investors alike with the opportunity to beat competing bidders to the punch and to purchase properties that would not be considered eligible for a conventional mortgage.

Chain break

The latest figures from Bridging Trends suggest that the second most common application for bridging finance as of right now is funding chain breaks. This is where homeowners looking to relocate effectively use bridging finance to become cash buyers. They borrow against the equity they have tied up in their current home; the funds needed to purchase their next property are released within a few days, and the transaction is wrapped up as promptly as possible. Property chains have become increasingly complex and fragile as of late as competing bidders go to extremes to beat their rivals to the punch.

Light and heavy refurbishments

Another popular use for bridging finance is funding light and heavy property refurbishments. Homeowners, for example, often take out a bridging loan to cover significant improvements to their properties before listing them on the market for their maximum value. Elsewhere, investors looking to flip homes for profit routinely use bridging finance to fund their projects before selling their properties for the biggest possible profit. As bridging finance is designed to be repaid within a few months, it is ideal for short-term undertakings like these.

Auction purchases

Purchasing properties at auction can pave the way for significant savings. It is not uncommon for homes and business properties to sell at auction for less than £50,000, making them ideal as ‘fixer-upper’ projects. But as the full balance on auction property purchases needs to be paid within 28 days, no conventional mortgage or property loan is viable. Bridging finance, which can be organised and accessed within a few working days, has become the go-to for many thousands of people looking to pick up bargain properties at auction.

Business purposes

Business owners looking to cover time-critical gaps in their finances have been turning to bridge finance specialists in record numbers. Bridging finance is uniquely flexible and accessible, with no specific limitations on how the funds can be allocated. From purchasing stock to upgrading business equipment to covering staff wages and tax bills, bridging finance has a broad range of applications for business owners and SMEs. It can also be secured against a wide variety of assets of value, making it more accessible than many comparable types of secured business loans.

Tracking down and buying your dream home is never easy. In times of unprecedented housing shortages, competition for desirable homes in most parts of the country is at an all-time high. Unexpected price increases by sellers or the possibility of being outbid by a rival bidder are only two reasons why transactions can and do fail.

In fact, some estimates suggest that as many as 25% of planned property purchases result in disappointment.

With conventional mortgage completion times averaging around 12 weeks, there is ample time for things to go wrong along the way. Traditionally, cash buyers have been afforded the kinds of privileges that have given them a major advantage over mainstream homebuyers.

Today, it is a set of privileges that can be accessed by anyone who owns their current home. If you are planning to relocate and looking to escape the trappings of traditional property chains entirely, a low-cost bridging loan could be just the thing.

How a bridging loan can speed up a transaction

A bridging loan is effectively a fast-access, short-term loan that can be used for any legal purpose. In this context, the funds needed to purchase your dream home are secured against your current property. The more equity you have tied up in your current home, the more you can borrow in the form of a bridging loan.

With all the essential paperwork in place, bridging finance can be organised within a few working days. This means being able to ‘jump the queue’ and beat competing bidders to the punch, with all the flexibility and convenience enjoyed by a cash buyer.

You buy your new home for cash (which may pave the way for a generous discount), you leave your previous home on the market for as long as it takes to sell for its full value, and you repay the bridging loan when your previous home sells. In the meantime, the bridging loan accrues interest at a rate as low as 0.5% per month, making it a much more affordable transaction than any conventional mortgage.

As the name suggests, the facility can be used to ‘bridge’ the gap between buying your dream property and selling your current home. Whereas the process would usually work the other way around (sell first, buy later), bridging finance allows you to buy first and sell later. And in doing so, reduce the risk of having to watch your dream property slip through your fingertips.

Bridging loans: common-sense care and caution

As a bridging loan is issued in the form of a secured loan, you face the risk of your property being repossessed if you do not fulfil your repayment obligations. This is something that must be taken into account and carefully considered before applying for any type of secured loan.

Bridging finance is designed to be repaid in the form of a single lump sum payment, typically 1 to 12 months after being issued. You therefore need to be confident that your previous home will sell successfully during this time in order to provide you with the funds needed to repay it.

A bridging loan is a strictly short-term facility and should not be taken up with long-term repayment in mind. The more promptly a bridging loan is repaid, the lower the interest and borrowing costs that apply.

Before applying for a bridging loan with the purchase of a property in mind, consult with an independent broker to discuss the options available and your suitability for bridging finance.

For some time, investment property purchases have been the most common use for bridging finance in the UK. More aspiring and established investors than ever before are looking to leverage the explosive competition in the UK housing market, using fast-access bridging loans to fund time-critical property purchases.

Meanwhile, a growing contingency of homeowners is turning to bridge finance for an entirely different reason. Second only to investment property purchases, breaking free of property chains is now the second most common reason for taking out a bridging loan.

During the first six months of the year, at least one in every five bridging loans was issued for this purpose.

The risk of broken property chains

Never has competition for quality homes in desirable parts of the UK been greater. Even so, there are no guarantees at any point during the property purchase process that the transaction will go through.

Incredibly, research suggests that up to 25% of all residential property sales fall through due to broken property chains. The longer and more complex the property chain, the higher the likelihood of one or more links being compromised.

A property chain is defined as “a line of buyers and sellers linked together because each is selling and buying a property from one of the others.” When buying or selling a home, you are at the mercy of every other buyer and seller within the same property chain.

Should any property sale or purchase fall through before your own transaction is complete, it may be rendered unviable.

Why do property chains collapse?

Nobody lists a property for sale with the intention of the transaction falling through. Even so, there are many reasons why a property chain can and does collapse with such regularity.

Typical examples of this include the following:

• A change of circumstances for the buyer or seller, rendering them unable to continue with the transaction.
• The buyer or seller of a property simply changes their mind at some point during the deal and withdraws from the chain.
• A competing bidder submits a higher bid that is accepted by the sellers, despite them having already agreed to sell the property to someone else.
• Mortgage applications may encounter disruptions and delays, or a decision in principle may be reversed for any number of reasons.
• A survey conducted on a property may uncover unexpected problems and structural issues, rendering the agreement null and void.

In each of the above instances, the property chain comes crashing down and brings all sales and purchases therein to a grinding halt.

Fixing property chains with bridging finance

This is where bridging finance can offer an invaluable lifeline to those looking to escape the trappings of the conventional property chain. With a bridging loan, you borrow money against the value of your current home, which is used to purchase your next property for cash.

Along with speeding up the purchase process, these types of transactions are in no way reliant on any other buyers or sellers. In addition, cash buyers are often afforded additional incentives by sellers looking to complete transactions on their homes as quickly as possible (often up to 2% off the home’s standard purchase price).

For faster and more convenient than a conventional mortgage, a bridging loan can be organised and accessed within a few working days. The full balance is then repaid when the borrower’s previous property sells for its full market price, a few weeks or months down the line.

“I’m not surprised that chain-break finance is one of the top reasons to use bridging loans. Property transactions are booming, and we’re seeing a large number of solicitors trying to exchange and complete on the same day,” said Dale Jannels, Managing Director of Impact Specialist.

“This inevitably will result in people pulling out of purchases late on, and therefore clients need a short-term loan to fill the gap their buyer left behind.”

All indications point to another buoyant year for bridging finance, following another major spike in loan applications. On the whole, the total value of the UK’s bridging sector has grown by as much as 22% over the past 12 months alone. More private borrowers and commercial customers are taking out bridging loans than ever before, but why?

Bridging finance differs from most conventional loans and mortgages in that it is a strictly short-term facility. Typically issued over a term of 12 months or less, bridging finance is also comparatively quick and easy to arrange. With all the essential paperwork and supporting documentation in place, the funds that are needed can be accessed within a few working days.

Coupled with monthly interest as low as 0.5%, the appeal of bridging finance is easy to understand; the more difficult and expensive it becomes to borrow money from major High Street banks, the more business flows the way of the UK’s thriving bridging sector.

A major spike in loan completions and applications

The most recent raft of figures suggests that between Q1 and Q2 this year, total bridging loan values swelled from £156.8 million to £178.4 million. This represents a growth of 13.8% over the course of three months alone. Year-on-year, total lending volumes skyrocketed by approximately 21.8% between Q1 2021 and Q2 2022.
Even so, there is still some way to go until the sector reaches pre-pandemic performance, having hit an all-time record performance of £180.9 million in Q4 2019.

As for why so many people are taking their business to bridge loan specialists, purchasing investment properties remains the single most common application for bridging finance. Following the trend of several previous consecutive quarters, investment property purchases once again accounted for almost a quarter of all bridging loans taken out in Q2 this year. This includes landlords purchasing properties to let out to tenants and investors looking to flip homes for capital gains.

Meanwhile, 21% of bridging loans issued in Q2 were used to help homebuyers break out of property chains. With competition in the housing market at an all-time high, more homeowners than ever before are using bridging finance to tap into the equity they have tied up in their homes and beat competing bidders to the punch.
Funding significant property improvements and refurbishments remained a popular use for bridging finance during Q2, accounting for around 30% of all loans issued.

A gradual decline to come?
Speaking on behalf of Henry, Director Geoff Garrett suggested that while the immediate outlook for the bridging sector is bright, the coming months could bring a gradual slowdown in overall activity.

“An increase in bridging loans does not signify that people are struggling financially. Such loans are taken in order to fund major purchases or investments but can only be granted to people who can prove they have larger, longer-term loans coming their way, such as a mortgage,” he said.

“Instead, an increase in bridging loan totals indicates that the systems in place are struggling to keep up with demand and can’t match the desired pace of buyers and sellers. The housing market, for example, is moving more slowly than it did a year ago, even two and three years ago. At the same time, buyer demand is extraordinarily high, and activity is through the roof. This causes delays in the conveyancing and buying process, which, in turn, increases the need for bridging loans.”

“However, with the cost of living and interest rates rising so rapidly, one has to expect to see a slight drop-off in buyer demand and, therefore, a decline in bridge financing over the next year or so.”