The sector has seen strong growth since being valued at £750 million in 2011, to £2.2 billion in 2014 and has now almost doubled that figure two years later.
This type of short term finance is attractive to property investors and developers who are looking to break the property chain and the time taken to process a traditional mortgage. Instead they look for bridging loans which can take just two to three weeks to be transferred, allowing them to complete quickly on a property and then refinance immediately or resell the property at a higher price.
Some of the most well-known lenders in the industry include Dragonfly, Aldermore, West One Loans and Precise Mortgages.
The industry by numbers
40+ lenders in the UK, with around 10 companies doing the bulk of the lending
100+ brokers in the UK
0.59% is the lowest interest rate charged per month
3 to 24 - months the loan is open for
75% - maximum loan-to-value
£250 million - maximum borrowing amount
Other uses for bridging finance
The main use for bridging is to help complete on a property where there is a strict deadline. For this reason, it is popular for those buying property through an auction [0], since there is a 28-day deadline to pay the full amount and the applying for a mortgage may take too long to facilitate.
But using bridging for property developers and investors is not the only reason for using this type of finance, explains Bridging Loan Hub [1], as individual homeowners can use a bridging loan if they want to complete on a new property but are having trouble selling their own one. They can use the money borrowed to seal the deal and once they have sold their original house, they can simply pay back the loan.
Elsewhere, businesses can use bridging finance to release equity in their company and raise money. An ideal scenario is purchasing a bigger office because you need to employ more staff and grow your business. Using the office space as security, the loan can be repaid once your business has generated more income. In a famous example, Del Monte Foods once borrowed $1.6 billion from multi banks to expand their company.
What affects the amount you can borrow?
There are several factors affecting the amount you can borrow. It is largely determined on the loan-to-value (LTV) that you are eligible for based on the value of your security and other aspects such as affordability and credit history. The maximum LTV for regulated lenders is 70% of the property's value but this can increase to 75% for unregulated providers. Naturally, every lender will have their own criteria and the amount available from vary accordingly.
What fees are involved?
The lowest rate of interest available in the UK starts at 0.59% per month. The best deals are usually available from brokers and by following the law of Treating Customers Fairly, they are obligated to give you the lowest price possible.
Additional fees apply, especially if a property is being used as security. Other fees include solicitor, valuation fees, broker fees (2%) and procurement fees (up to 2.5%). For those looking to leave their contract early, there are also exit fees that apply, even if it means paying back the entire loan in full.