The bridging loan sector experienced a significant decline in Q2 2023, with transactions falling to £165.7m, marking the quietest quarter since Q1 2022. According to the latest Bridging Trends data, this represents a 40.6% drop from Q1’s record-breaking £278.8m.
The decline comes as consumers demonstrate caution amid stubbornly high inflation and mortgage interest rate hikes, impacting the overall demand for bridging finance.
The effects of consecutive base rate hikes pushed the weighted average monthly interest rate on a bridging loan from 0.79% to 0.84%, the highest since Q2 2020 (0.85%).
Despite the rise, borrowers maintained restraint as the average loan-to-value remained under 60%, at 56.9%, up from 54.7% in Q1.
The data reflected a reluctance to overburden, with “minimum loan amount” replacing “regulated bridging” as the top search criteria among brokers on Knowledge Bank’s system in Q2.
With soaring interest rates and product pulls from mortgage lenders impacting confidence, borrowers turned to bridging finance to complete property purchases.
In Q2, regulated bridging extended its market share to 48.7%, the highest proportion since Q3 2020’s 53% during the stamp duty holiday. Bridging loans to prevent chain breaks remained the most popular use for bridging finance at 24%.
Investors and professional landlords re-entered the market, with bridging loans for investment purchases jumping from 15% in Q1 to 22% in Q2, taking advantage of a sluggish property market to purchase assets at reduced rates.
Conversely, the demand for second charge bridging loans dropped to 10.7% in Q2, its lowest level since Q3 2021.
Pressure continued as the average bridging loan completion time increased from 54 to 58 days in Q2, while the average term remained consistent at 12 months.
Sam O’Neill, head of bridging at Clifton Private Finance, said: “The rise in rate doesn’t come as a huge surprise but it’s good to see that it isn’t as much of a dramatic knee-jerk reaction as perhaps it could have been.
“’Chain break’ leading the charge in loan purposes shows that despite cost, a bridging loan is often a means to an end and that the juice is worth the squeeze.
“Similarly, it’s no surprise to see investment purchases on the rise as investors (new and old) capitalising on opportunities in the marketplace often come to the surface at times of uncertainty.”
Dale Jannels, MD at impact Specialist Finance, added: “Although these latest figures might seem gloomy in terms of lending volumes in Q2, it feels far from it in terms of enquiries, although it is definitely harder and more time-consuming to get some cases placed and funded with interest rates where they are currently.
“Despite this, what we are seeing is more motivated borrowers and fewer ‘tyre kickers’, which leads me to suspect a degree of pent-up demand is there and is ready to be unleashed once economic conditions become more favourable.”
Matthew Dilks, bridging & commercial specialist at Clever Lending, concluded: “I have heard suggestions that regulated bridging will start to reduce as property sale exits are squeezed by lower sale values being achieved, but these figures along with what we are seeing at the start of Q3 show this isn’t really happening yet and I’m not sure it will either going forward.
“Within the chain break figures listed, I would anticipate a decent proportion of these will be downsizers and such borrowers have substantial equity, so can ride slight reductions in their eventual sale price.
“Finally, it’s also interesting to see a rise in finance for heavy refurbishments and I would expect to see this continue with professional portfolio investors seeking to improve yields with many opting to buy properties and immediately refurb, with many taking advantage with amateur landlords selling up.”
