With a significant increase in unemployment expected once the furlough scheme ends in October 2020 alongside the start of the second wave of COVID-19 cases that has emerged since mid-September, the likelihood of the property market making up ‘lost ground’ before year-end is unlikely to happen. Although this will damage some bridging opportunities, in terms of helping borrowers to complete transactions, it could open up opportunities in other areas such as refurbishment and rebridging.

According to our small business owner survey that is included within this report, 30% of owners would consider using bridging finance in the future – up from 27% in 2019.

MBD believes that the value of the bridging loans market has risen by 73% over the last five years – from £5.3 billion in 2016 to £9.15 billion in 2020.

Despite achieving significant growth over each of the last five years, annual growth diminished from 18% in 2017 to an estimated 10% in 2020.

According to both the ASTL and MT Finance, the industry was hit by the coronavirus pandemic shutdown in Q2 but still managed to complete some significant deals even through lockdown.

Key issues covered in this Report

  • The impact of COVID-19 on bridging loans and how lenders and borrowers will react to the new market conditions.

  • How the bridging loans market will adapt to the post-COVID-19 environment.

  • The value of individual segments in the market in 2020.

  • Small business owner attitudes towards and interest in bridging loans.

COVID-19: Market context

This update on the impact that COVID-19 is having on the bridging loans industry was prepared on 22 September 2020.

The first COVID-19 cases were confirmed in the UK at the end of January 2020 with a small number of cases in February. The government focused on the ‘contain’ stage of its strategy, with the country continuing to operate much as normal. As the case level rose significantly, the government ordered the closure of non-essential stores on 20 March 2020.

A wider lockdown requiring people to stay at home except for essential shopping, exercise and work ‘if absolutely necessary’ followed on 23 March.

On 10th May 2020, the UK government updated its coronavirus message from “stay at home, protect the NHS, save lives” to “stay alert, control the virus, save lives”. It also introduced a new alert scale system, ranging from green (level one) to red (level five), similar to the UK’s Terror Threat Levels.

On 29 May 2020, Chancellor Rishi Sunak announced that the Coronavirus Job Retention Scheme will end at the end of October. Before then, employers must pay National Insurance and pension contributions from August, then 10% of pay from September, increasing to 20% in October. Self-employed people whose work has been affected by the outbreak will receive a “second and final” government grant in August 2020.

From 18 July 2020, local authorities were given power to enforce local shutdowns if there was a localised rise in COVID-19 cases.

From 24 July 2020, the wearing of face coverings became compulsory in shops and supermarkets in England. Those who fail to do so will face a fine of up to £100. Health Secretary Matt Hancock said the move “gives people more confidence to shop safely and enhance protections for those who work in shops”.

From 8 August, the wearing of face coverings in more indoor settings, such as cinemas and places of worship, became mandatory.

From Monday 14 September 2020, the government announced that people must not meet with people from other households socially in groups of more than six. This applies both indoors and outdoors, including in private homes. Education and work settings are unaffected, and organised team sports will still be able to proceed, as will weddings and funerals.

From Friday 18 September 2020, it became mandatory for certain businesses to have a system to collect NHS Test and Trace data and keep this for 21 days. Core COVID-19 Secure requirements also became mandated for hospitality businesses and egregious breaches enforced.

On 21 September 2020, the UK’s COVID-19 Alert Level was raised from Level 3 (substantial risk, general circulation) to Level 4 (severe risk, high transmission) following the agreement of all four Chief Medical Officers.

From 22 September 2020, employees were advised to work from home where possible in an attempt to reduce unnecessary contact with others.

Economic and other assumptions

Mintel’s economic assumptions are based on the Office for Budget Responsibility’s central scenario included in its July 2020 Fiscal Sustainability Report. The scenario suggests that UK GDP could fall by 12.4% in 2020, recovering by 8.7% in 2021, and that unemployment will reach 11.9% by the end of 2020, falling to 8.8% by the end of 2021.

The current uncertainty means that there is wide variation on the range of forecasts however, and this is reflected in the OBR’s own scenarios. In its upside scenario, economic activity returns to pre-COVID-19 levels by Q1 2021. Its more negative scenario, by contrast, would mean that GDP doesn’t recover until Q3 2024.

Mintel is working on the assumption that a vaccine will be available by mid-2021, but that there will be continued disruption to both domestic and global markets for some time after that.

With a potential second wave of infections emerging in mid-September 2020, social distancing measures are likely to remain in place over the rest of 2020 and into 2021, whilst we also do not expect industries such as hospitality, travel and live entertainment to return to any kind of normality until a vaccine is introduced.

Products covered in this Report

For the purposes of this report, Mintel has used the following definitions:

A bridging loan is a flexible, short-term loan usually secured against property, where the borrower agrees to pay back the loan plus interest by an agreed date. The loans are typically used to provide finance for property purchases while a borrower is awaiting the completion of a contingent sale of an existing property, or simply where other finance is scarce.

There are two main types of bridging loans:

Closed bridge: The borrower has a set date when the loan will be repaid. For example, the borrower has already exchanged to sell a property and the completion date has been fixed. The sale of that property will repay the bridging loan.

Open bridge: The borrower sets out a proposed exit plan to repay their loan, but there is no definitive date at the outset. There will be a clear cut-off point that the loan has to be repaid by.

Since bridging loans are usually offered on the basis of security and the proposed exit, rather than the borrower’s ability to meet regular repayments, bridging can assist in a wide variety of situations.

The following sectors make up a large proportion of the bridging loans market and are quantified in this report:

  • Residential – these loans are short-term, interest-only loans generally used to help meet an immediate financial need when dealing in the property market. Applications are often decided on the value of the property and exit strategy, more so than the ability to meet loan payments.

  • Commercial – loans that are similar to residential bridging loans and are used when there is a gap in financing that needs filling quickly. However, for these types of loans, the overall use of the property in question has to be above 40% (not an absolute figure) commercial. The exit strategy usually involves refurbishing the property and then selling it or refinancing onto a traditional commercial mortgage. These loans also cover more general business purposes such as providing working capital, financing tax liabilities, covering short term cash-flow issues, etc.

  • Development – loans that tend to be used by property developers, private builders, individuals, partnerships, limited companies, and limited liability partnerships. Funds are typically used to finance improvements to assets that help increase market value and marketability. These loans tend to cover development projects such as extensions, conversions of existing property into flats, and other structural changes.

  • Second charge – refers to loans secured by a mortgage/charge that ranks behind the first charge lender: that is, the security provided to the lender ranks second. A second charge loan will generally have a higher interest rate payable to the lender than a first charge loan as there is more risk associated with the loan for the lender. For example, if a £100,000 home has a £50,000 first charge loan, a second charge may be secured against the remaining £50,000.

The FCA defines bridging loans as property-secured loans with terms of 12 months or less. The European Mortgage Credit Directive has taken up this definition and extended it to include loans of “no fixed duration…used by the consumer as a temporary financing solution”. This will, of course, include loans secured by second charges (or third, etc.). Although both definitions refer to loans subject to regulation, they are generally used in relation to the whole market.

Other terms used in this report include:

Aggregated loan balance: The total amount of outstanding loan obligations.

Buy to let: A property that the owner has bought to rent out to tenants.

Consumer confidence: An economic indicator that gauges how consumers interpret the present economic environment and their expectations for the future.

First (1st) charge: A ‘first charge’ loan refers to the loan secured by a first mortgage/charge against the security property. A first charge lender holds the senior security position in a loan. This means that should a borrower default or be unable to meet the repayment schedule, the lender is able to sell the property to get their funds back.

High-net-worth individual: A classification used by the financial services industry to denote an individual or family with high net worth. Although there is no precise definition of how rich somebody must be to fit into this category, high net worth is generally quoted in terms of liquid assets over a certain figure.

Insolvency: When an individual or business can no longer meet its financial obligations with their lender or lenders as debts become due.

Liquidity: The ability to convert an asset to cash quickly.

Loan application: A document that provides the essential financial and other information about the borrower on which the lender bases the decision to lend.

Loan-to-cost: The ratio of the price paid for an asset to the value of the loan that will finance the purchase.

Loan-to-Value (LTV): The ratio of how much is borrowed compared to the value of a property.

Peer-to-peer lending: A method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. Peer-to-peer lending removes the middleman from the process, but also involves more time, effort and risk than general lending scenarios.

Rental return or yield: A numerical representation of the rent received compared to the value of a property or mortgage. The higher the rental return, the less paid to cover interest on home loans and other costs involved in owing an investment property, like council rates and insurance.

Rolled-up interest: Instead of interest being paid by a borrower per month or year, the interest payment is ‘rolled-up’ and made at the end of the loan period.

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