Bridging Finance Activity Spikes By Almost 40% In 2021
Total bridging finance activity increased by almost 40% last year. Bridging Trends contributors collectively approved loans to the value of £626.7 million – up from the £455 million recorded the year prior, equating to a 38% increase. Third-quarter lending saw a particularly vigorous increase, coming out at a total of just over £190 million. This was as buyers scrambled to make use of the stamp duty holiday before it was withdrawn. That being said, buyers need to prepare for market volatility.
What Is Bridging Finance?
Bridging finance, also known as a bridging loan, is the temporary funding borrowed to cover a business’s short term costs. This short team loan covers a company for up to a year. Or, until they can secure regular long term financing within that year. You can obtain a bridge loan from investment banks, equity financing organizations or venture capital firms. However, they are more expensive than long-term financing options, with interest rates being between 8.5% and 10.5%. More so, to secure these loans, lenders require collateral such as your property or other valuable assets. Certainly, consider bridging finance for temporary funding.
Bridging LTV Hits A New Record High
Interest in regulated bridging loans continued acceleration throughout 2021, accounting for fewer than 41% of all bridging transactions. Regulated bridging saw a particularly strong performance during the first six months of the year, occupying almost 48% of the market.
First-charge bridging accounted for the vast majority of transactions, while second-charge loans occupied a market share of 15%. This was down from 23% the year before. Meanwhile, average monthly interest rates on bridging loans fell from 0.79% in 2020 to 0.76% in 2021. The average LTV for bridging loans last year reached a new record high of just under 57% – a significant increase on the 50.7% average of 2020.
Funding purchases of investment properties remained the top application for bridging finance, accounting for one in every four completed transactions. The second most popular application was funding property chain breaks, which accounted for 18% of all bridging loan completions. The average term on a bridging loan for 2021 was 12 months, while completion times were up slightly to 52 days – two days higher than in 2020.
How Bridging Loans Differ From Traditional Loans
Bridging loans differ from traditional loans in a variety of ways. First, bridging loans typically offer quicker application, approval and funding processes. Meanwhile, traditional financing can require lengthy loan preapproval processes. Additionally, bridging loans have shorter terms, higher interest rates and more origination fees than traditional loans. However, these terms are usually mute since borrowers need quick and convenient funding. Plus, many are willing to pay higher rates knowing that soon they will be able to pay it back with a low-interest, long-term financing option. More so, unlike traditional loans, bridging loans rarely have repayment penalties. Certainly, bridging loans and traditional loans vary in several ways.
Why Businesses Use Bridging Finance Loans?
Finally, various industries around the world utilize bridging finance as a fast business loan option. Typically, these loans are obtained to fund property-specific developments, such as purchases or renovations. Of course, they can cover development costs for both commercial and residential purposes. Or, borrowers use this funding option to bring their properties to an acceptable stage where lenders can offer commercial mortgages. This solution is popular among companies who haven’t started development or lack enough development to be eligible for a commercial mortgage. Certainly, have a clear and effective exit plan for when you don’t need the loan any longer. Surely, businesses can use bridging loans for a variety of short-term projects.
With financial activity experiencing rapid change on account of the COVID-19 global pandemic, bridging loan trends have shifted drastically. In fact, bridging activity spiked by nearly forty-percent in 2021. Moreover, the loan-to-value ratio with these associated transactions is also showing serious signs of growth. Follow the points highlighted above to learn about why bridging finance activity spikes by almost 40% in 2021.