Bridging the mortgage loan gap

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Bridging loans make the grade

  • To understand how the bridging loan market works
  • To learn about the risks associated with bridging loans
  • To grasp what taking out a bridging loan entails
Bridging the mortgage loan gap

Prior to the 2007 credit crunch, credit was easy to obtain and bridging finance was a very last resort due to its high interest rates. Mainstream lenders typically backed away from providing it as those who needed a bridging loan tended to be deemed riskier. 

The risk of bridging finance lies within the exit strategy and speed of the transaction, as the exit strategy willeither be refinance or sale of a property and a lender will want to know if you can actually get the refinance or sell the property in time. Furthermore, the fast nature of these loans means there are fewer checks and the security is likely to be based on assets. 

As a result of this perceived risk, interest rates were very high to protect the lender – they could have been anywhere from 12 per cent to 20 per cent a year.

Historically, apart from a number of specialist lenders, the market was very small. The reason being was that you did not really need bridging finance because mortgages were easier to come by – ironically, the availability of property finance was a major factor of the crash. Banks were lending on income ratios of seven times a person’s income. Northern Rock was giving out loans for the deposit, and a mortgage on top of this – effectively, mortgages for 100 per cent of a property’s value. There was also the dangers of self-certification mortgages, enabling someone to assess their own affordability. 

In the early 2000s, it was easy for developers to obtain credit from their bank for development because it was all about getting money into property – it was an era of easy credit. 

However, following the collapse of the property market, which, at its worst dropped in value by 40 per cent, many short-term lenders would only lend net 60 per cent of the loan to its value. We are now starting to see the loan to value rise to around 70/75 per cent.

The credit crunch restricted the flow of credit because all of the main lenders pulled back from property lending as a whole for fear of another crash. The two major pressures in the market were banks recapitalising – and from a regulatory point of view, having to increase their capital percentage. As defaults started to rise, banks needed to hold more capital and reduce the bad loans on their loan books. 

Legacy issues from the crash meant that, from a compliance perspective, self-certification went out of the window. More stringent affordability checks were put in place and income ratios were capped at four times income.

Other factors are also now taken into account, such as children and everyday expenditure. We now hear horror stories about lenders turning down clients because of their spending habits. 

From a development point of view, more restricted access to quick development finance meant the restrictive nature of mainstream lenders caused the evolution and brought bridging finance to the fore. 

There are now more than 200 lenders in the short-term lending market, so it has gone from a marginal market to a more prominent one in a little over 10 years. The upside of increased competition is typical rates of 1 per cent per month have now dropped to 0.85 per cent per month. Now, the more dominant market lenders are pushing prices down to as low as 0.49 per cent, including second charges. There are a number of different lenders in the market now, for example: 


Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. What are the risks associated with bridging loans?

  2. What levels are LTVs starting to rise to?

  3. The financial crisis had no impact on self-certification; true or false?

  4. What level are rates being pushed down to per month by dominant market lenders?

  5. Which of the following is a bridging loan NOT suited for?

  6. What is a typical early repayment charge period on a 12 month loan?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • To understand how the bridging loan market works
  • To learn about the risks associated with bridging loans
  • To grasp what taking out a bridging loan entails

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