Among the many consequences for the loan industry following the 2008 financial downturn was the explosive growth of bridging loans. What was once a niche product has grown to become a multi-billion pound industry in the United Kingdom, with an array of companies beginning to offer bridging products.
Typically used for commercial or residential property, bridging loans have offered an alternative to the mortgage market and it now exists as a robust industry in its own right. In 2011 the West One Bridging Index was launched to collect data about the bridging market in the UK and to track growth in number of loans and loan value.
Bridging Loans in 2015
As you can see in the above graph the total value of bridging loans in the UK has trebled since 2011 – reaching nearly £2.8billion as of June 2015. Gross loan value increased 30% from June 2014 to 2015 alone.
In terms of loan size – the average value now stands at £747,292, this represents significant growth from around £300,000 in 2010. Growth has been particularly consistent in 2015 – especially following the UK election results which brought greater stability to the financial markets.
Loan-to-value ratio has remained relatively steady around the 48.5% mark after gradually increasing through 2014 and 2015. This means despite the huge growth in average loan value, the level of risk undertaken by borrowers has remained steady. Interest rates have also remained consistent, averaging out at 1.16% between June 2014 and 2015 compared with 1.17% for the twelve months prior.
As volume of loans and average value continues to increase while LTV ratios and interest rates remain consistent the confidence of borrowers should help increase leading to even greater growth.
Explaining the Growth in Bridging Loans
We can see that the growth in bridging loans over the last five years has been impressive. But, what has driven this growth? What makes bridging loans such an attractive proposition? Primarily the reason is flexibility – traditional property loans, i.e. in the form of a mortgage, are difficult to obtain, involve red tape and can take weeks and weeks to arrange. When you consider that bridging loans are used to obtain funding for property deals and investment opportunities, it is easy to see why time is of the essence and how bridging loans are able to fulfill this demand.
Amidst the caution in the mainstream mortgage market, bridging loans offered and continue to offer an alternative at a time when credit was still in demand, but not readily available. It also offers borrowers access to higher than usual LTV loans that would only normally granted to people with predictable income and impeccable credit.
Future of Bridging Loans
The bridging loan industry has certainly matured over the past five years, but there is also certainly much more progress to be made. There are lingering inaccurate perceptions that bridging finance is associated with higher risk, which can prove a barrier to greater penetration in the loans market. However, the industry has proved both fertile and resilient – with larger and larger loans becoming a staple. Competition among lenders has led to fantastic loan offers to borrowers, but what is also encouraging is that regulations, responsible lending and education about the pros and cons of short term finance, have not been sacrificed in pursuit of attracting more customers.
If the industry continues to grow and mature, the £3billion value could quickly become £10billion in the next decade.