Homebuyers’ reliance on bridging loans increases during the pandemic

Bridge loans have seen a 30% increase since the start of the pandemic as UK homebuyers work hard to stay afloat in an increasingly busy housing market.

The latest research from Revolution Brokers reveals that in the first quarter of 2020, at the very start of the pandemic, total bridging loans in the UK stood at £122.9m. As the pandemic tightened its grip, quarterly totals fell significantly, falling to £79.4m in the second quarter of 2020.

However, when the government began to introduce homebuyer incentives such as SDLT leave, market activity skyrocketed and bridging loans increased steadily.

In the first quarter of 2022, bridge loans totaled £156.8 million, an increase of 28% since the start of the pandemic.

What is a bridging loan?

Bridge loans are short-term loans often used to bridge the gap between buying one property and selling another.

Many home buyers rely on funds from the sale of their current home to pay for their new home, but often they will need to purchase the new home before closing the sale of their current home. This means they need a short-term loan to make the purchase possible.

Bridge loans can be set up very quickly in an emergency but must be secured by an asset which in the vast majority of cases is real estate.

Most common reasons for taking out a bridging loan

The most common reason someone may take out a bridging loan is that the real estate chain they are part of has collapsed, jeopardizing their ability to buy their dream home. A bridging loan helps them secure the purchase while waiting for the sale of their current home.

Bridging loans are also common with auction purchases. When buying a house at auction, the buyer has very little time, usually around four weeks, to come up with the money. A bridging loan is often necessary.

Benefits of a bridging loan

Borrowing quickly means a property purchase transaction can stay on track even if outside influencers mean the buyer doesn’t have immediate access to the funds they’ve been waiting for.

In addition, it is possible to borrow large sums of money – enough to buy a house! This is why auction buyers often rely on bridging loans. It is also possible to secure these large loans against a property, which is not always possible through high street lenders.

While most people will want to repay their bridge loan very quickly, repayment terms can be flexible and tailored to the specific circumstances of the borrower.

The challenges of a bridging loan

There are also important considerations to take into account before taking out a bridging loan.

First and foremost, the fact that it is a secured loan means that there is a risk of losing the asset against which the loan is secured if for some reason the loan cannot be refunded within the agreed time.

Bridge loans can be taken out very quickly and for large sums, but in return for this convenience they often come with a premium in the form of higher than average interest rates.

Finally, in addition to high interest rates, bridging loans can come with a range of additional fees that increase their overall expenses.

So why are bridging loans increasing?

The simplest explanation for the rise in bridging loans since the start of the pandemic is that the housing market is getting busier.

As more people try to buy homes, the chains get longer, making sales more precarious, and professionals, such as agents and transfer agents, get busier, causing longer transactions to complete.

This means that more and more buyers are finding their preferred time frames are out of whack, resulting in the need for emergency short-term loans to help them stay in the market while the deal unfolds on its own. .

Almas Uddin, Founding Director of Revolution Brokers, commented: “The government has very intentionally made it difficult for potential buyers to resist getting involved in the property market during the pandemic. Significant tax breaks led many to believe this was too good an opportunity to pass up and so market activity exploded. It is natural that more and more people need short-term loans to stay afloat when processes are delayed.

“But interest rates are on the rise and don’t look set to slow any time soon. This means that the already high rates associated with bridge loans will become even more expensive. Therefore, it is critical that when looking at at bridging finance you get a complete view of what is available depending on your personal circumstances.

Garland K. Long