A concise history of bridging loans
Bridging finance as we use it today in the UK is a fairly new financial product, but lending money as a concept is as old as civilisation itself.
In this article, we examine the origins of lending, how bridging finance is used today, and how it might evolve in 2024.
Contents
A brief history of money lending
Lending money has been part of civilisation for thousands of years, in fact it's as old as the Babylonians [1] when the chief Mesopotamian temples offered not only loans and banking but were also religious centres, law courts, schools, and archive depositories.
Prior to the establishment of banks in Rome in the second century BCE, it was difficult for the Romans to access large amounts of capital, forcing them to operate within the limitations of their household wealth. Roman elites frequently made loans to one another when household wealth was depleted. [2]
Closer to home in 1522 and again in 1523, Henry VIII brought the concept of loans to wider public attention in England [3] when he forced all liable persons to lend to the crown to support the French War. While the exact numbers of lenders are unknown, records indicate the inhabitants of hundreds of towns and cities were forced to lend, generating some £200,000, all secured by a promissory note for repayment by Henry VIII.
Origins of Bridging Loans
There's an intrinsic link between bridging finance and residential property, and whilst the reasons for using bridging finance have expanded in the last decade, its' original purpose is still its most common use - to finance the purchase of residential property [4].
Activity in the construction sector, increasing property values and bridging finance appear to go hand in hand. However, the house price booms and busts that influenced the UK housing market are relatively new concepts that date back less than 80 years.
1920's
Pre-1920, over 80% of the UK population rented their homes. After the First World War, there was a great drive to build houses in the UK brought about by both a social need and a political will. The 1919 Housing Act [5] provided subsidies for local authorities to build council houses, and 500,000 were built in three years. Building homes served the need for quality housing and helped restart the economy through job creation in the construction sector.
1930's
By the mid-1930, the interest rate was at 2%, and a sustained flood of cheap finance and a private-sector building boom ensued. The UK was building 350,000 new homes a year. Cities were expanding, and home ownership had increased to over 30%, up just 10% from before World War 1. The average price for a house was £750, the equivalent of £45,000 in today's money.
1940's
The Second World War of the 1940s caused widespread devastation to UK cities and infrastructure, and the construction of new homes stopped altogether. After the war, there was a desperate need for high-quality housing.
1950's
The war had motivated the government to build beyond the green belt of London, and the 1950s saw council houses being built at a rate of 250,000 a year.
1960's
By 1960, the UK had completed some 400,000 private and council house builds, and the average cost of a new home was £2,530, the equivalent of £62,084 today.
With new high-quality housing stock and high consumer demand, 1960 saw the first real boom in the housing market. With that boom came the need for finance to ‘bridge the gap’ between the purchase and sale of homeowners; hence, the term 'bridging finance' was coined.
Bridging finance wasn't overly accessible at this time. It was only offered by some banks and building societies for existing homeowner clients looking to buy a new house before their existing sale had been completed.
1970's
Then came the first housing bust of the 1970's. The easing of credit policy by the Bank of England grew house-price inflation to 36%. The average price of a home, which had risen from £2,000 to £5,000 between 1950 and 1970, now doubled in the next three years.
The 1970s housing bubble burst is linked to the recession, double-digit interest rates from 1978 and an ensuing period of stagflation in the UK. Several issues caused the economic turmoil, not least of all due to severe energy supply disruption. A double-whammy hit the UK; firstly, the oil crisis of the Yom Kippur War and the Opec oil embargo led to a massive cut in the oil supply to global markets. Secondly, the UK experienced minor strikes that caused widespread power outages and forced the government to introduce the rationing of electricity, which brought in 3-day working weeks for all industries. Electricity blackouts nationwide were widespread, and the three-day state of emergency suffocated commerce.
1979 capped off the economic rollercoaster with interest standing that June at 17%.
1980's
The 1980s were a period of economic volatility. In 1981, the government tried to control inflation, causing a deep recession. The recession particularly hit manufacturing, causing unemployment to rise to over 3 million.
The Housing Act 1980 [6] heralded a new era of homeownership of council tenants in the Right to Buy largely contributed to the next housing boom of the late '80s, where house prices rose by 16% in 1987 and 25% in 1988. Homeownership grew from 55% of the population in 1980 to 64% in 1987. By the time Margaret Thatcher left office in 1990, it was 67%. 1.5 million council houses were sold before the dawn of the next decade.
The right to buy helped continue the housing market boom and the early to mid 80's saw a period of high economic growth and rising inflation. However, at the end of the decade, the housing market started to falter, and the lack of rental properties created an opportunity for buy-to-let landlords.
1990's
The housing market bubble was well and truly burst, and the UK experienced a recession in 1991. The recession was primarily caused by sustained high-interest rates, falling house prices and an overvalued exchange rate.
The average fall in house prices between 1989 and 1993 was 20%. Properties in London were hit hard and lost 32% of their value. This was primarily due to the sheer number of repossessed properties, where some 345,000 homes flooded the market and supply far outstripped demand.
2000's
In the early 2000s, buy-to-let landlords and Property Flippers made their mark on the housing market. Mortgage criteria were heavily relaxed, and the private rental sector ballooned by 50% from 2000 to 2010.
What was propping up the housing market? Cheap credit and very little in the way of lending criteria. Interest rates had climbed down from the double digits in the 90's. 125% mortgages were a reality with banks like Northern Rock. Self-certification, where the self-employed could state how much they earned for mortgage approvals, helped grow the sector. Accessible finance created property investors out of the masses, and with it, average property values skyrocketed from £132,705 to £295,694 - an increase of over 122%, up until 2008.
Cheap credit came at a cost. Enter the Great Recession of 2008.
2010's
After 2008's Great Recession bank lending was heavily restricted and more stringent credit policies were put in place, however the UK public had fallen in love with property speculation and investment and average property prices bottomed out after less than a year.
The fall in property prices was relatively mild compared to the troubled '90s, and by April 2012, any drop in value had been reversed, with average property prices now £299,065.
Banks were discouraged from any form of high-risk lending activity. Loan-to-value ratios on lending were now firmly below the 100% mark for the next 13 years at least.
The financial crisis of 2008 had a major impact on lending in the UK, with banks becoming more risk-averse and less likely to lend money to businesses. This created an opportunity for specialist lenders willing to take on higher levels of risk than banks. These lenders provided alternative sources of finance, such as bridging loans, enabling businesses to access the capital they needed despite being turned down by traditional banks.
Bridging finance can be used for property purchases and provides businesses access to capital when needed. For example, a bridging loan can bridge the gap if a homebuyer needs additional funds to purchase a property before their mortgage is approved. Bridging loans can also be used in cases where a property needs to be purchased quickly, such as when a homebuyer is in a bidding war or estate agents need to move quickly on a sale.
Bridging finance became an increasingly popular form of lending, with more and more businesses turning to specialist lenders for access to capital. The rise of specialist lenders has allowed businesses to access funds quickly, enabling them to take advantage of opportunities that might otherwise have been missed due to the lack of financing from traditional sources.
Overall, bridging finance provides businesses with an important source of capital when they need it most. From its first recorded use centuries ago to its current popularity amongst businesses and homebuyers, bridging finance has proved to be an invaluable source of funding for those in need.
Whilst Bridging Loans can be secured on any asset, for the most, a Bridging Loan is typically secured on property and used as a short-term form of finance that lasts no more than 12 months.
COVID-19 then struck in 2019, stopping most property transactions in their tracks. During successive lockdowns, estate agent viewings were cancelled, remote working meant valuations were non-existent and conveyancing ground stopped.
It wasn't all negative for the housing market, though, as in between lockdowns, there was a desire for more space and garden offices and with some migration away from the cities, many regional property prices soared. Furlough had meant that mass redundancies hadn't materialised. Renters had evictions put on ice. Mortgage holidays helped the average mortgage borrower save a surplus of cash.
With a decline in property transactions, though, activity in the bridging loan market was quiet, ultimately caused by a lack of demand or an inability to facilitate what demand existed.
2020's
Bridging products have diversified, and there are now many names for essentially the same type of lending. A 2022 poll of UK consumers also shows that what people call bridging in the UK has diversified, with bridging loans being the most common term.
Today, the practice of lending money has evolved into a global market worth some £6,926.96 billion [7] and is expected to grow at around 8.8% year on year.
The bridging loan market in the UK was worth over £4.94 billion [8] in 2022, surpassing pre-pandemic levels. The property market remains buoyant, rising by 23% over the last five years.
Despite the rebounding commercial sector, residential bridging loans, specifically the original bridging loan use, bridging the gap between buying and selling or refinancing property, still dominated the market.
Bridging finance is still considered a higher-risk form of lending because it involves short-term loans, high-interest rates and, in many cases, non-status borrowers. Banks dislike this type of lending because they are exposed to greater risks if the exit strategy isn't met and repayment is not made on time or if there is a default on the loan. This aversion to high-risk lending meant that the few major banks that did offer bridging finance often rejected applications.
It should be noted that because most major banks do not offer bridging loans, drawing meaningful comparisons between whether a bridging loan from a specialist lender is more expensive than bank finance isn't possible. When reviewing the general banking products on offer by the major banks, however, it's notable that the average interest rate for any loan product appears to be a minimum of 5.14% (08.06.23).
Despite their reputation for being high-cost, the Bank of England's 14 successive interest rates in 2022-23 increased the general cost of borrowing, lessening the gap between high-street bank borrowing and bridging loans.
As we use them today, Bridging loans began to be seen in the United Kingdom as a viable option for property investors and land speculators.
The future of bridging finance
The bridging finance space is maturing in the UK. Borrowers choose bridging finance to help them save or make money through opportunistic property investment. Lenders also like bridging finance as they receive a higher return than other forms of lending.
Specialist lenders are now becoming strategically minded, considering significant technological investments, raising additional financing capabilities and product diversification.
No doubt there will be several interesting news headlines in 2024 detailing mergers and acquisitions of lenders and brokers, new lenders coming into the market just as quickly as other lenders are exiting.
As the market develops and funder appetite grows, we anticipate seeing more capital flowing into the market and a rise in the number of bridging lenders switching to institutional funding arrangements.
Final thoughts
Bridging finance has been a valuable source of capital in the UK for decades, offering property investors, businesses and homebuyers access to funds quickly when needed.
Understanding its history and purpose can help us better appreciate this unique form of financing, which is becoming increasingly important in modern times.
By recognising bridging finance's invaluable contribution to the UK economy, businesses can confidently take advantage of this vital form of lending. With a greater understanding of bridging finance's history and purpose, businesses can confidently use this unique form of financing to their advantage.
