2020s Most Important Bridging Finance Trends

Bottom Line: The bridging sector saw a combined fall in lending of £278 million last year, but evidence suggests the market is bouncing back from the impact of three consecutive lockdowns.

Collective bridging transaction completions were down by £278 million last year.

The average LTV on bridging loan issues decreased to 50%.

Bridging loan interest rates fell to historic lows during the fourth quarter.

Regulated and unregulated loans occupied an equal share of the market.

The most common application for bridging finance in Q4 was chain breaking.

The economic fallout attributed to the first two national lockdowns had a major impact on the bridging finance sector last year. As a result, total transactions for 2020 were down by approximately 38% from the previous year, to £455 million compared to £732.7 million in 2019.

Decreases in bridging finance activity were particularly prominent during the first six months of 2020, when the UK’s real estate market was temporarily shut down in its entirety. In the first quarter, bridging loans valued at a total of just under £113 million were issued. By the end of Q2, this had plummeted to just £79.4 million as lockdown restrictions took effect.

However, reassuring signs of improvement were noted during the closing six months of the year. Total bridging finance activity in Q3 came out at £115.52 million, increasing further to £137.22 million in the fourth quarter.

The latest figures released by Bridging Trends highlight a series of key findings for 2020. Bucking the trend of previous years, there was almost no difference in the share of the market occupied by regulated and unregulated transactions in 2020. Regulated transactions accounted for 36% of the market in 2018 and 39% in 2019, last year climbing to an impressive 49.4%.

Average monthly interest rates also fell to record lows during Q4, averaging just 0.72%. This is more than a full percentage point lower than the 0.85% peak recorded in Q2, which was followed by a fall to 0.78% in the third quarter.

Evidence suggests that bridging finance specialists are continuing to distance themselves from high LTV products, with the average LTV on a bridging loan last year coming out at 50.7%, significantly lower than the 52.9% and 54.6% of 2019 and 2018, respectively. The lowest average LTV of all was recorded in Q2 at the height of lockdown, 48.8%.

23% of the bridging loans issued in 2020 were second-charge loans, presenting a sizeable uptick of 20% from the year before. Q2 in particular saw a major spike in second-charge bridging transactions, an all-time record high of 26.1%.

Primary applications for bridging loans changed little from previous years, with funding investment purchases once again topping the table for the year as a whole, accounting for 22% of all transactions. Interestingly, chain break overtook investment purchases in the fourth quarter, accounting for a full 23% of all bridging loans. Bridging finance for business purposes came out with an annual market share of 11%; heavy refurbishment also accounted for 11% of all transactions last year and 12% of the bridging loans we used for regulated refinance purposes.

On average, bridging loan completions took 50 days in 2020, slightly longer than the 47-day average in 2019.

The average loan term in 2020 was 12 months, the same as in 2019. The average completion time averaged 50 days, up from 47 days in 2019 and 45 days in 2018.

Gareth Lewis, commercial director at MT Finance, comments:

“After the first lockdown, we saw the re-emergence of some larger lenders, and if you combine this with the stamp duty changes, it is no surprise that there was a stimulus on rates and regulated bridging in the latter part of the year.”

“As the vaccine rolls out and we gradually emerge from this lockdown, I believe we will see a new transactional flow from renewed confidence in the economy and businesses re-establishing themselves.”

Dale Jannels, managing director at Impact Specialist Finance, comments:

“The impact of the pandemic on the bridging sector is shown clearly in Q4’s data, but it also alludes to the activity we are now experiencing, some of which, but not all, is related to the Stamp Duty Holiday deadline.”

“It’s clear though that bridging finance is becoming better understood by the wider broker market (not just those in the specialist sector), and there is more confidence about the options it can provide customers, which should mean that 2021 could see a real watershed moment for this type of finance.”

Kevin Blount, head of operations at Clever Lending, comments:

“We certainly had an increase in inquiries during Q2, which led to a spike in new business submitted to lenders in Q4. We are working hard with lenders to find solutions, who in turn are reviewing their criteria and interest rates to fit the current market.”

“The SDLT holiday helped to bring business to the bridging market, which is continuing into 2021.”

Chris Whitney, head of specialist lending at Enness, comments:

“I am actually quite surprised that the fall in lending quantum in 2020 was so large. The market has always ‘felt busy’ and Enness did not see such a big drop in lending volumes.”

“Yes, we did see some big names close their doors as the whole country was forced to work out their strategies in the face of the pandemic on a micro and macro scale, but some still aren’t back as they were. However, I think most of the short-term lending market either carried on throughout or paused only temporarily as working practices were refined and made fit for purpose under the restrictions we faced, as well as the level of uncertainty that still hangs over us.”

“The absence of some big names has reduced supply, coupled with some restricting LTVs, which has had a marked impact on lending levels. I think this is also reflected in the fall in average LTVs over the year.”

“However, as the trend in Q3 and Q4 indicated, I think we will see volumes bounce back quite quickly, and with people re-entering the market, the data is reflecting the stiff competition lenders face for business in terms of lower interest rates.”

“There are some big high-street names who see themselves as ‘business banks’ but I know from first-hand experience that many did not step up to the challenge and support their customers as they should at this time. Borrowers were turned away or faced a huge amount of red tape to navigate on their own, not being able to get the support they needed so badly in a timely manner.”

“I think this is reflected in the increase in second-charge loans and the increase in regulated loans as well. The mainstream high-street lenders made it very hard to increase current loans, and if they did, it was taking much longer than normal. Consequently, I think that is why we see ‘chain breaking’ high on the list for uses of bridge loans. Lots of borrowers use bridge loans as an essential tool on a regular basis, but I think we have seen an increase in new to the sector borrowers, which has contributed to a shift in some of the historic dynamics.”

“I think overall the short-term lending market can be proud of what it managed to achieve in unprecedented times. I know there are an awful lot of people who are very grateful, whose businesses, personal lives, and families are better for what the industry was able to offer them.”

“I am sure 2021 will have its challenges, but I feel our industry is ready to take on whatever is thrown at us.”