Property buyers are turning to high-interest bridging loans to gain an edge over rivals amid intense competition in the UK property market and a continuing shortage of available homes.
The value of bridge loans, which buyers can use as cash to complete a purchase, rose 8.5% in the first three months of 2022, compared to the same period last year, according to data from 12 UK bridge loan brokers.
The Bridging Trends report found that loans were most often used by those buying investment property, historically the main market for this expensive form of short-term debt. But the second most popular reason for taking out a bridging loan was for “chain break financing” – including by residential buyers looking to circumvent the need to sell one home before buying another.
This is the reason given in almost a quarter of cases, compared to less than a fifth at the end of 2021. Other reasons for taking out a bridging loan include those who pay an inheritance tax bill while waiting to sell an inherited property. , or investors who want to renovate a dilapidated, non-mortgaged property.
Highlighting the increase in chain-breaking transactions and regulated bridge loans, Sam O’Neill, head of bridges at brokerage Clifton Private Finance, said: “Applications are up, inquiries are up and completions are up. rising.”
However, bridging loans are considered a niche lending for home purchases due to the high interest rates charged. With fees included, they can cost around 8-12% per year, compared to 3% for the average two-year fixed rate agreement of a conventional mortgage. Lenders charge more because they expect the bridge to be paid off over a short period, usually 12 months. Borrowers should consider the 1-2% arrangement fee, plus appraisal fees and legal fees.
Adrian Anderson, director of brokerage Anderson Harris, said: “There is a place in the market for bridge financing, but borrowers should exercise caution as terms can be very expensive.”
Demand for property has pushed up house prices, which rose 9.8% in the year to March, according to the Office for National Statistics – although that pace of growth is slower than the 10.9% observed in February.
As competition for homes has intensified, real estate agents and buyers have favored cash buyers, who can make a purchase faster and with more flexibility than those looking for a mortgage. Bridge loans, which can be obtained faster than a mortgage and held for an offer, give borrowers that cash edge 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 right now. And there are no signs of easing this side of summer.
He, too, urges caution for buyers using bridge financing, recalling customers in the 1990s who had yet to sell their existing home, but traded contracts on their subsequent purchase using a so-called “open” bridge loan. . They had loans secured against two properties as prices fell and interest rates on both loans rose.
“The only time I would recommend someone to think about it is if they’ve traded on selling their house,” Pryor said. “That means they have some sort of contractual arrangement with someone they can go to if the sale fails.”
Dale Jannels, managing director of financial brokerage Impact Specialist Finance, said borrowers could settle a bridge loan by refinancing with a conventional mortgage lender; they could sell the property; or, in the case of inheritance, to be redeemed by the brothers and sisters. “The most important thing with bypass surgery is that there is a way out,” he said.
With a shortage of homes for sale and high demand among buyers, he added, the risk that a borrower’s previous property will not sell – leaving them unable to service the loan, if it is their chosen output – was weak. “In the current climate, with the number of people coming to each property, that’s not an issue.”
As the Bank of England has steadily raised its main interest rate since December, homebuyers have become more eager to complete a purchase in anticipation of more expensive loans in the future. “The urgency for a transaction has accelerated over the past two months,” Jannels said.