This report will explore the following key issues regarding the bridging loans industry in the UK:

• What are the key determinants driving the bridging loans industry?

• Was the market affected by the financial crisis? Has there been any structural changes as a consequence?

• Has regulation restricted industry development?

• Can the sector withstand competition from other lenders in the years ahead?

• What does the future hold for bridging finance?

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. They 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.

Since bridging loans are usually offered on the basis of the 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

• Commercial

• Development

• Second Charge

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 lender or lenders as debts become due.

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

Loan application: 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.

Second (2nd) charge: A ‘second charge’ loan refers to the loan 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.

All values quoted in this report are at current values unless otherwise specified.

‘Net interest payments’ have been used as a definition of company turnover, where turnover has not been specifically stated in annual accounts.

Some numbers in tables do not add up due to rounding methods.

Reports are researched and written by MBD’s in-house, specialist business-to-business consultants. Research is based on both an analysis of official information and on original, trade research, providing both a quantitative and qualitative view of the market. MBD’s unique range of frequently updated reports provide an integrated body of ongoing research, enabling deep understanding of the prevailing trends and of the drivers of these trends based on trade opinion.

The following abbreviations appear in this report:

The UK’s improving economic environment, alongside growing bridging loan availability, has led to bridging finance becoming an increasingly common ‘go-to’ option for businesses and investors.

Most bridging loans can be granted within a couple of weeks, with some only taking a matter of days. This easily outperforms high street lenders, with mortgages often taking months to arrange. The fast finance available through bridging loans is a key competitive advantage as it gives users more time to complete projects or to arrange long-term funding alternatives.

The short-term finance sector prides itself on a high loan conversion rate as it grants loans to most applicants. Bridging lenders do not base their decisions on an applicant’s age, employment status, or poor credit scores. Instead, lending approvals are based on the assets placed against the loan, so bridging lenders can provide vital capital even when high-street lenders refuse.

Bridging loans are being used to support commercial and residential property transactions, auction purchases, and renovation and development projects. Businesses are also taking out the funding option when they require a quick cash injection.

Bridging finance has experienced huge growth since the global financial crisis, largely due to mainstream lenders being subjected to tightening lending criteria and prioritising other objectives.

Growing confidence in the housing market - with greater investments in building and development initiatives and buy-to-let schemes - has increased demand for bridging loans, which provide investors with the means to renovate and refurbish a property without an immediate mortgage.

The bridging sector has developed over the last few years and evolved into a versatile, flexible and innovative form of alternative finance. Lenders have diversified product ranges to offer a suite of bridging products to cater for almost any scenario requiring short-term, property-backed finance.

This diversification, combined with an influx of new lenders entering the market, an abundance of funding and a genuine appetite to fund deals, has increased competition among lenders and resulted in the lowest bridging rates the market has ever seen.

During the recession, bridging lenders stepped forward and provided real alternatives to struggling borrowers rejected by mainstream lenders, banks and building societies. The primary driver was monetary gain, but these lenders also provided an invaluable service to those in need of critical funding for the survival of their business or property development/acquisition.

Over the last five years, the traditional lines of separation between bridging lending and mainstream lending have blurred. This can create instability from a regulator’s perspective, with checks and balances required to address the undue risk to borrowers of a predominantly unregulated market.

While new regulations will provide administrative challenges for bridging lenders, changes will also provide opportunities to discredit long-running stigmas associated with this form of lending. For example, it has been largely forgotten that while traditional mainstream lenders significantly strayed away from loan underwriting criteria, bridging lenders remained in compliance with underwriting criteria when carrying out transactions among high-risk borrowers.

This means that mainstream lenders have had to undergo substantial process overhauls to meet standards imposed by the Mortgage Market Review from April 2014 and by the Mortgage Credit Directive from March 2016.

The transition for bridging lenders has, meanwhile, been far less demanding as most of the industry’s operations are classified as unregulated loans. High street lenders may have departed from conventional standards of responsible lending, but bridging lenders have largely stuck to strict affordability criteria, realistic earnings multiples, and high loan to values - which are vital standards given the characteristics of the average bridging loan borrower.

However, many advisers still misunderstand, harbour negative misconceptions or are not familiar with bridging finance. Industry improvements, driven by increased institutional interest, have helped create a more professional and transparent sector, with bridging emerging as a credible and necessary financial product. It is now important for brokers or advisers to understand the ever-changing bridging market, which has a growing range of products and commercial opportunities available to customers.

Bridging loans are available from multiple sources, from small lenders to large organisations regulated by the Financial Conduct Authority (FCA), which took over from the Office of Fair Trading in April 2014 as the regulator of the consumer credit industry. An FCA-regulated broker will only advise a customer to take out bridging finance if they have suitable circumstances.

The days of bridging loans being used only to bridge the gap between a purchase and sale of a residential property are long gone. The sheer diversity of lenders and the sector’s volume and value growth - now estimated to be more than £5 billion - has been achieved through usage diversification. While the underlying purchase and sale of property still underpins many bridging loans, a vast number of reasons exist as to why short-term liquidity is required.

In 2015, £2.59 billion worth of bridging loans were written by members of the Association of Short Term Lenders - up by 13.8% on 2014, but down on the 54% growth achieved in 2014. The value of applications for bridging loans also increased by 14% compared to the previous year, down from the 63% annual growth recorded in 2014.

This more subdued growth is expected to continue in 2016 as figures for the year ending March 2016 showed that loans written by ASTL members reached £2.7 billion. Despite the slowdown in growth, these figures are a long distance away from the £477 million achieved in the year ending September 2011, and highlight the market’s rapid growth in less than five years.

West One Loan’s own Bridging Index supported this growth trend, when the lender reported that the industry provided £3.5 billion in loans during 2015 - up from £2.5 billion in 2014.

Loan books grew from £580 million in 2011 to an estimated £2.13 billion by March 2016. Bridging is now used for a wide variety of purposes, including by businesses raising money against their property to take advantage of business opportunities, and by developers.

By the end of 2015, the UK alternative finance market, including bridging, was expected to have provided working, growth and expansion capital for an estimated 20,000 SMEs, up from 7,200 in 2014 - as well as funding for hundreds of community and voluntary organisations across the country.

Nineteen bridging firms formed the Association of Short-Term Lenders (ASTL) in April 2008 to fully capitalise on newly-created opportunities in the industry and help promote bridging finance. Until then, the short-term lending industry was perceived as a neglected area within financial services. One of the ASTL’s first tasks was to raise the profile of members’ activities, bringing broader awareness and transparency to the wider financial industry.

The ASTL was the start of an education process, opening up opportunities for short-term lending and providing a transparent platform for products.

The sector was once known for charging over-inflated rates and fees with a very limited and unreliable amount of funding, but the ASTL has helped bring about a more institutionalised market.

Increased transparency became necessary after the early 2000s, when the property market boomed and buy-to-let and sub prime mortgages inflated at an inexplicable rate, before the bubble burst, leading to the global financial crisis.

However, despite the expanding presence of the ASTL, there still remains a lag between growth and transparency. With new property investors looking to capitalise on the sector’s high rewards, all lenders were in high demand, including those in the short-term market. Transparency and consistency have always been difficult for the short-term lending market due to the isolated number of smaller lenders with limited, and usually private, available funds - but the surge in demand made this even more apparent.