Bridging Loans - UK - 2021
Overview
 
The circumstances surrounding the need for bridging loans has changed. Deadlines are tight, and in this competitive market where demand for residential real estate is rising, buyers are keen for fast and flexible finance. In this respect, the ability to quickly turn around loans from application to deployment has become even more important for borrowers.

At the onset of the COVID-19 pandemic, bridging lenders were put to the test with underwriters and legal professionals having to quickly deal with enquiries even when working remotely, whilst at the same time, having to ensure there were strong, stable funding lines in place so loans could be issued without delay.

With the end of the coronavirus business support schemes on the horizon, it is expected that more borrowers, developers and businesses alike, will turn to bridging to provide them with the means to complete projects and to boost cash flow levels.

Despite recording a 10% fall in value in 2020, MBD believes that the value of the bridging loans market has risen by 24% over the last five years from £6.25 billion in 2017 to £7.73 billion in 2021.

Excluding the 2020 decline, annual growth has averaged almost 15% since 2017, highlighting the continued significant development of the industry.

According to both the ASTL and MT Finance, the industry was significantly hit by the coronavirus pandemic shutdown in Q2 and Q3 2020 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
The first COVID-19 cases were confirmed in the UK at the end of January 2020, with a small number of cases in February. Rapidly rising case numbers led to the first national lockdown, starting on 23 March. It wasn't until 15 June that non-essential stores were allowed to reopen, followed by pubs, restaurants, hotels and hairdressers on 4 July and many beauty businesses on 13 July.

By September, it had become clear that the UK was at the start of a second wave, and social distancing measures were intensified. Continued increases in infection numbers led to Wales implementing a two-week national lockdown from 19 October, England announcing a month-long lockdown from 5 November and Scotland introducing a new five-level system of coronavirus restrictions.

Despite these restrictions, however, case numbers continued to increase. All four UK nations tightened restrictions further in January 2021, effectively leading to a full UK-wide lockdown.

On 22 February, Boris Johnson announced the roadmap to an easing of restrictions in England, starting with the reopening of schools on 8 March, followed by easing of restrictions on outdoor gatherings on 29 March, and with a hoped end to all restrictions by 21 June, although the growth of the Delta variant means this final lifting of restrictions was delayed until 19 July. The Welsh and Scottish governments also gave more details on their plans to ease restrictions, with both nations taking a slightly more cautious approach to the one planned for England. 

Even before the full re-opening of the economy, retail sales and Mintel’s own household finances tracker provided encouraging signs of a rapid return to consumer confidence, and a willingness to spend at least some of the savings that many households were able to build up over lockdown period. Even the rapidly rising case numbers across the UK in June and July did not seem to have significantly dented this confidence.

The UK’s vaccination programme started on 8 December 2020. As of 18 August 2021, 89.6% of the UK population had received their first dose of the vaccine and 69% had received their second dose.

On 19 July 2021, England removed almost all of its COVID-19 restrictions with no social distancing measures in place and no limits on the number of people gathering indoors or outdoors. However, advice remains on mask-wearing in some indoor areas and crowded spaces.

On 7 August 2021, Wales removed almost all of its own COVID-19 restrictions although advice remains on mask-wearing in some indoor settings.

On 9 August 2021, Scotland also removed almost all of its own COVID-19 restrictions although advice remains on mask-wearing in some indoor settings.

Restrictions remain in place in Northern Ireland although there are plans to remove these over the coming weeks and months.

Economic and other assumptions
Mintel’s economic assumptions are based on the Office for Budget Responsibility’s central scenario included in its March 2021 Economic and Fiscal Outlook Report, but also take into account predictions made by other economic forecasts, including the Bank of England. 

After the fall of 9.8% over the course of 2020, the OBR’s scenario suggests that UK GDP will grow by 4% in 2021 and 7.3% in 2022. GDP isn’t expected to return to pre-COVID-19 levels until the second quarter of 2022, although this is six months earlier than the OBR forecast in November 2020, mainly because of the faster than expected rollout of vaccines.

Unemployment is expected to peak at 6.5% in the fourth quarter of 2021. As with GDP, this is more positive than the OBR’s November forecast, but the OBR does raise the prospect of long-term scarring on employment, especially in the more exposed retail and hospitality sectors.

The rapid vaccine rollout and the continued efficacy of the vaccine, however, means that more recent economic forecasts have been significantly more optimistic than the OBR’s March forecast, even given the rise of the Delta variant. We have factored this rise in optimism into our market analysis and scenario forecasts.

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.