Property buyers are turning to high-interest bridging loans to get an edge over rivals amid intense competition in the UK housing market and a continuing shortage of available homes.
The value of bridging loans, which buyers can use as cash to clinch a purchase, rose 8.5 per cent in the first three months of 2022, compared with the same period last year, according to data from 12 UK bridging loan brokers.
The Bridging Trends report found loans were most commonly used by those purchasing an investment property, historically the core market for this short-term, costly form of debt. But the next most popular reason for taking out a bridging loan was “funding a chain break” – including by residential buyers looking to circumvent the need to sell one home before buying another.
This was the reason given in nearly a quarter of cases, up from less than one-fifth at the end of 2021. Other motives for taking out bridging loans include those paying an inheritance tax bill while waiting to sell an inherited property, or investors who want to renovate a rundown, unmortgageable property.
Pointing to the increase in chain break transactions and regulated bridging loans, Sam O’Neill, head of bridging at broker Clifton Private Finance, said: “Inquiries are up, applications are up and completions are up.”
However, bridging loans are regarded as a niche area of lending for residential purchases because of the high interest rates charged. With fees included, they can cost about 8 to 12 per cent a year, compared with 3 per cent for the average two-year fixed rate deal on a conventional mortgage. Lenders charge more because they expect the bridge to be repaid over a short period, typically 12 months. Borrowers must factor in arrangement fees of 1-2 per cent, plus valuation and legal fees.
Adrian Anderson, director at broker Anderson Harris, said: “There is a place in the market for bridging finance, however borrowers should tread carefully as the terms can be very expensive.”
Demand for property has pushed up house prices, which rose by 9.8 per cent in the year to March, according to the Office for National Statistics – though this was a slower pace of growth than the 10.9 per cent seen in February.
As competition for homes has stepped up, estate agents and buyers have favored cash buyers, who can complete a purchase more quickly and flexibly than those seeking a mortgage. Bridging loans, which can be obtained faster than a mortgage and held in readiness for a bid, give borrowers this cash advantage in the market.
Henry Pryor, an agent who acts on behalf of buyers, said: “If you haven’t got the money in a Samsonite, you might as well go home. Buying a house is extremely difficult at the moment. And there isn’t any sign of it easing this side of summer. “
He too urges caution on buyers using bridging finance, recalling clients in the 1990s who had yet to sell their existing house, but exchanged contracts on their onward purchase using a so-called “open” bridging loan. They had loans secured against two properties as prices fell and the interest rates on both loans were rising.
“The only time I would ever advocate anybody thinking about it is if they’ve exchanged on the sale of their home,” Pryor said. “That means they’ve got some sort of contractual arrangement with somebody they can go after if the sale fails to complete.”
Dale Jannels, managing director at finance broker Impact Specialist Finance, said borrowers might settle a bridging loan by refinancing with a conventional mortgage lender; they might sell the property; or, in inheritance cases, be bought out by siblings. “The most important thing with bridging is that there is an exit route,” he said.
With a shortage of housing stock for sale and high demand among purchasers, he added, the risk that a borrower’s previous property might not sell – leaving them unable to clear the loan, if that is their chosen exit – was small. “In the current climate, with the number of people who are going for each property, it’s not an issue.”
As the Bank of England has raised its main interest rate steadily since December, homebuyers have become more anxious to conclude a purchase in expectation of costlier loans in future. “The urgency of a transaction has accelerated within the last couple of months,” Jannels said.