In a competitive property market, when good opportunities arise, it can sometimes be a case of blink and you’ve missed it.

For residential and commercial markets alike, the imbalance between supply and demand means the window of time to secure a desirable investment can be narrow – and it can also quickly slam shut. Move too slowly and, in some cases, the satisfaction of sealing a deal is replaced by the frustration at just missing out.

This goes some way to explaining the growing interest in bridging finance in recent years. Bridging finance is designed to provide a short-term funding ‘bridge’ between longer-term borrowing arrangements. There are many instances where it can be beneficial (see below), and many are linked to providing more immediate tactical funding in the context of wider strategic objectives.

In the first quarter of 2022, the value of bridging loans increased by 8.5% year-on-year, according to data from Bridging Trends. Borrowers cited the purchase of an investment property as the main reason behind accessing bridging finance, ahead of funding a chain break. The average loan term was clocked at 12 months and average completion time at 53 days.

How rates compare

Mortgage interest rates remain the subject of acute speculation in the wake of the decision by the Bank of England’s Monetary Policy Committee to raise the Bank Rate to 3.00% in November – the highest level for 15 years. The full impact of recent rises remains to be seen, but the knock-on effect can already be seen in the fact that a typical deal for a two-year fixed rate mortgage (at the time of writing) was pushed to 6.46% – a level not seen since the financial crisis in November 2008.

Bridging Trends data for the first three months of 2022 shows that rates for bridging finance fell to an average of 0.71% from 0.77% the previous quarter. These monthly figures should be seen in the context of higher annualised rates – and increasing interest rates could feed through into bridging rates – but they provide a nod to the narrowing gap between bridging lenders and retail banks.

This trend has helped shift the historic perception of bridging finance as a relatively expensive option, reserved for only experienced property developers. Instead, it has become an increasingly appealing and accessible choice for more mainstream lending, with bridging now more popular among small to medium developers or for home movers looking to break a chain or release equity.

The appeal of bridging

Greater affordability in bridging finance is, in part, down to increased competition among an expanding pool of providers. This has given way to lower interest rates and pushed service levels higher.

There are a variety of reasons why borrowers will turn to bridging finance. At a fundamental level, there are no monthly payments, no early repayment charges and the potential for free property valuations (subject to application).

For some, the appeal is in the short turnaround times, which can be as little as one week and provide the responsiveness needed to jump at property investment opportunities. Because most bridging lenders fix the rate for the term of the loan, others are drawn to the certainty that costs won’t increase.

Others still value the ‘common sense’ approach from lenders, who are typically more flexible than major banks. Indeed, the diverse range of funding supply lines available from a relatively deep pool of lenders means there is often greater acceptance of different types of property.

Examples of where bridging can bring benefits

• Renovation projects where the property will eventually be sold or re-mortgaged at an increased value 
• Releasing equity from a property before it’s sold
• Breaking a chain of property transactions, e.g., where a borrower is looking to move home without being reliant on their sale
• Where funds are needed at short notice to take advantage of a business opportunity, e.g., on a below market value purchase, raising working capital, investing in a business
• Buying/refinancing a site without planning consent with the aim of raising development finance to build the scheme once planning has been granted

The right option for the right circumstances

In today’s property jungle, it’s not enough to only be alert to opportunity, you also need to have the appropriate means to respond. Aside from speed, factors such as the stability of lenders and the terms of any loan are equally important elements to consider.

Bridging won’t always be the most suitable choice, and it shouldn’t be viewed as a substitute for a conventional long-term mortgage. But in cases where funds are required for a short period, and there is a viable exit strategy in place, it can present an appealing alternative to more traditional borrowing options.

The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.