Bridge loans, or bridging loans as we call them in the UK, are a type of short-term loan usually given for a period for up to one year (although the period may vary) that one takes while waiting for the arrangement of larger and longer-term financing of one’s projects. In short, it is financing that doesn’t fully cover all the needs of a borrower but serves as an interim source of capital before he manages to obtain more permanent financing or reaches the next stage of his project.
This type of financing has been in existence for a long time, but it is has been steadily growing in popularity for the last ten years or so, ever since the financial crisis of 2008, reaching previously unheard-of volumes at the end of 2018-the beginning of 2019. But why does it happen? What are the main attractions of this way of financing? What advantages does it bring to the table of investors who use them? Let’s try to find out.
The speed of bridging loans is one of the main factors that draws people to them. It usually takes just too much time to arrange a credit from high street lenders for it to be viable in many investment situations when action must be taken quickly in the face of inadequate capital. Unlike big banks, bridging lenders act quickly, giving investors a great deal of flexibility and breathing room. They no longer have to pass on attractive investment opportunities due to the lack of capital.
2.Banks are looking for ways to limit their risks
The financial crisis of 2008 scared banks big time, and since then they have been doing everything in their power to limit their exposure to the risks associated with real estate trade – and we don’t even mention ever tightening EU-based regulations defining the risk levels they have the right to take. As a result, it became harder for property investors to get loans they need from banks, which in turn led to the growing number of specialist and alternative lenders offering competitive bridging loan rates for investors looking for short-term financing solutions in this unsteady and uncertain market. The most common application of them is to bridge a gap between exchanging contracts to be able to complete a sale when you don’t have enough resources to do it at the time.
3.Low-interest rates have capital holders look for better ways to get ROI
Low-interest rates following the financial crash have created a situation in which a bridging loan offers a better return on investment for a capital holder than keeping the money in banks. At the same time, the market remains lively and competitive enough for the borrowers to see plenty of attractive offers, which means that they are not discouraged from looking for a source of financing here.
4.Brexit uncertainties in UK
Brexit fears have further promoted the spread of bridging loans as banks, specialist lenders and borrowers are all unsure of what to expect from the financial market over the next few years. The Bank of England has been keeping interest rates low because of the expected downturn after the UK leaves the EU, which means that lending is becoming ever cheaper. At the same time, the popularity of real estate investment remains high as investors are looking for ways of parking their capital while waiting for the long-term results of Brexit.
As you can see, bridging loans offer advantages both to borrowers and lenders, creating a situation in which huge numbers of new lenders are flowing into the market attracted by higher returns on investment than would be possible in most other areas. Meanwhile, borrowers are actively looking for short-term loans to deal with their current investment opportunities and resolve emergency situations. Although this type of loan originated to cover specific situations, it seems that it has already become a mainstream tool used to deal with a wide variety of financial problems. Its application is only going to grow in the future, as lenders are going to introduce new products tailored to deal with a greater variety of situations.