The fast-growing bridging loans industry is awaiting important feedback from the UK government over whether or not customers can receive payment holidays during COVID-19.
Bridging loans are often used as a way to ‘bridge the gap’ between the purchase and sale of another property and are often used by people and businesses to avoid traditional property chains.
Upon coronavirus, the UK government was quick to offer a three-month mortgage holiday for struggling households, which will give the average home a saving of around £2,100 over the three-month period.
These measures have been followed by a business interruption scheme for companies hit the hardest and payment holidays for personal loans, car finance and payday loans.
However, for bridging loans, there is yet to be any concrete guidance and the guidelines remain unclear with some funding falling under-regulated and non-regulated.
There are approximately 50 to 80 bridging lenders in the UK, with the most well-known including Precise Mortgages, Masthaven and MT Finance.
The vast majority of lenders have ceased from funding new enquiries during the coronavirus lockdown, which will impact the overall value of the industry which funded £4bn in 2018 and £7bn in 2019.
But for thousands of people that use bridging loans each month, the role of payment holidays could be significant.
Accordingly, bridging finance is a more expensive form of borrowing, largely because it is used for short term purposes and maximum periods of around 24 months. For households that have used bridging to move home, they rely on being able to sell their own home to pay it off. However, with completion and moving dates delayed because of covid-19, they risk using the products for longer than necessary and incurring greater fees.
Similar challenges apply for those using bridging loans for commercial purposes, with construction and refurbishments delayed for six weeks, and potentially longer. Borrowers risk paying for more months of bridging finance than they need, but a huge issue emerges when it comes to the end of the long-term and the borrower risks repossession or refinancing, but under potentially far less favourable terms.
Nicholas Wallwork of the Property Forum explains: “The vast majority of building sites have come to a standstill. As a consequence, those working against tight bridging loan finance repayment dates will struggle. The property/project, if work does not restart very soon, would likely be worth nowhere near their target value. As a consequence, they would not be able to raise as much traditional finance as expected which would usually be used to pay off the bridging loan. Indeed, when you also factor in the potential reduction in property prices on the whole there could be a huge shortfall.”