Over the last 10-15 years bridging loans have become an increasingly popular financial solution and they are now available from an estimated 150 providers.
These short-term loans provide quick funding for various purposes, from breaking property chains to securing auction purchases.
As you consider your financing options, you might wonder: do high street banks offer bridging loans?
This guide will explore the current choices for bridging finance, comparing high street banks with specialist lenders to help you make a decision.
Understanding Bridging Loans
Bridging loans are short-term, secured lending solutions designed to cover a temporary financial gap.
Typically lasting between 3 to 24 months, these loans offer quick access to funds, often within days. They’re secured against property or other valuable assets, which allows for faster approval but also means your asset is at risk if you fail to repay.
In the UK, bridging loans fall into two categories: regulated and unregulated.
Regulated loans are used for residential properties you or your family will live in, while unregulated loans are for investment properties or business purposes. This distinction affects the level of consumer protection you receive.
Consider this scenario: You’ve found your ideal home, but your current property hasn’t sold yet. A regulated bridging loan could help you secure your new home while you wait for your existing property to sell. This flexibility makes bridging finance an attractive option for many property buyers and investors.
High Street Banks and Bridging Loans
High street banks have a limited presence in the bridging loan market (and in the high street now!).
While some major banks like Barclays and NatWest offer bridging products, their offerings are restricted when compared to specialist lenders.
High street banks have stricter criteria, longer processing times, and less flexibility in their bridging loan products.
For example, Barclays offers a ‘Bridging Loan’ product, but it’s only available to existing mortgage customers and has specific eligibility requirements. NatWest provides bridging finance primarily for business purposes rather than residential property transactions.
The limited availability of bridging loans from high street banks is partly due to UK banking regulations. Following the 2008 financial crisis, banks face stricter lending criteria and risk assessment requirements, which can make offering specialised, short-term loans less appealing.
Why High Street Banks Are Limited in Bridging Finance
High street banks’ hesitancy in the bridging loan market stems from several factors.
Firstly, bridging loans require a different risk appetite compared to traditional mortgages. The short-term nature and often complex circumstances surrounding bridging loans don’t always align with banks’ standardised lending processes.
Secondly, regulatory constraints play a significant role.
The Financial Conduct Authority (FCA) imposes strict rules on bank lending practices, particularly for residential mortgages. These regulations can make it challenging for banks to offer the flexibility often required in bridging scenarios.
Lastly, bridging finance is a very specialised field.
It requires quick decision-making and a deep understanding of property markets, lending risks and development processes. Many high street banks aren’t set up to provide this level of specialised service efficiently.
To put this into perspective, specialist lenders dominate the UK bridging loan market. According to recent industry data, high street banks account for less than 5% of all bridging loans issued in the UK.
Advantages of High Street Banks
Despite their limitations, high street banks can offer some advantages for bridging loans.
Their established reputation and financial stability can provide peace of mind for borrowers. If you’re an existing customer, you might benefit from potentially lower interest rates or a smoother application process due to your established relationship.
Moreover, regulated loans from high street banks are covered by the Financial Services Compensation Scheme (FSCS), offering additional protection for borrowers. This can be particularly reassuring for those new to bridging finance.
Disadvantages of High Street Banks
However, the drawbacks of using high street banks for bridging loans often outweigh the benefits.
Their longer processing times can be a significant issue, especially in time-sensitive situations like property auctions. While a specialist lender might approve and fund a bridging loan in a matter of days, high street banks could take several weeks.
High street banks also tend to have less flexibility in their lending criteria, preferring to work with middle of the road, lower risk loans. You are more likely to need a good credit score with these lenders.
They may not consider complex income structures or unique property types that are common in bridging scenarios. This inflexibility can be particularly problematic in the diverse UK property market, where non-standard properties and complex ownership structures are not uncommon.
Consider a property developer looking to purchase and renovate a Grade II listed building using an SPV company. A high street bank might struggle to assess the risks and potential of such a project, whereas a specialist lender with experience in heritage properties could offer a more tailored solution.
Specialist Bridging Loan Lenders: The Alternative
Given the limitations of high street banks, many borrowers turn to specialist bridging loan lenders.
These lenders, which include private banks, alternative lenders, and dedicated bridging finance companies, offer several advantages.
Specialist lenders typically provide faster processing times, often completing loans within 5-14 days.
They offer more flexible terms and higher approval rates, particularly for complex cases that high street banks might decline.
Many specialist lenders can consider a wider range of security and have higher loan-to-value ratios, sometimes up to 75-80% compared to the 65-70% typically offered by high street banks.
How Specialist Lenders Differ from High Street Banks
The key difference lies in their approach to underwriting and risk assessment.
Specialist lenders often take a more holistic view, considering the overall viability of a project rather than relying solely on standardised criteria. They’re typically more comfortable with complex income structures, non-standard properties, and tight deadlines.
For example, a specialist lender might provide a renovation bridging loan based on the potential value of a property after renovations, rather than just its current value. This approach can be particularly beneficial for property developers and investors looking to maximise their returns.
These lenders will offer bridging finance using a second charge, and even secure a loan across more than one property, using a cross-charge facility.
The Role of Bridging Loan Brokers
Given the complexity of the bridging loan market, many borrowers choose to work with specialist brokers.
A good broker can access a wide range of lenders, including both high street banks and specialist providers. They can help structure deals that might not be available through direct applications and often secure better rates due to their relationships with lenders.
Brokers also bring valuable expertise to complex cases.
They understand the nuances of different lenders’ criteria and can match borrowers with the most suitable options.
When choosing a broker, look for one with specific experience in bridging finance. A reputable broker should be transparent about their fees and the range of lenders they work with.
The Evolution of Bridging Finance
Short-term finance similar to modern bridging loans was available in the UK as early as the 1960s, but it was primarily offered by high street banks and building societies to their existing customers.
The bridging loan market remained relatively small until the early 2000s, with only a limited number of lenders operating in this space. Most loans were used to avoid property chains collapsing.
Bridging loans gained significant popularity in the UK after the 2008-2009 global recession. Gross lending more than doubled from £0.8 billion in the year to March 2011 to £2.2 billion in the year to June 2014. This surge coincided with a notable decline in mainstream mortgage lending, as banks and building societies became more reluctant to grant home loans.
As bridging loans grew in popularity, they also attracted regulatory attention.
In 2011, the Financial Services Authority (FSA) warned homebuyers against using bridging loans as substitutes for ordinary mortgages, expressing concerns about potential misrepresentation by some mortgage brokers.
In 2014, the Financial Conduct Authority began regulating certain types of bridging loans, particularly those secured against residential property. This regulatory oversight brought increased consumer protection.
Today, bridging loans play a significant role in both business and real estate finance in the UK, offering short-term solutions for a variety of purposes, from breaking property chains to funding property renovations for quick sale.
The choice between a high street bank and a specialist lender will depend on your specific circumstances, the complexity of your case, and how quickly you need the funds.
Remember, bridging loans are a short-term financial solution and come with higher costs than traditional mortgages. It’s essential to have a clear repayment strategy in place before taking out a bridging loan.
With a base in central London, we have access to over 250 lenders, including high street banks, specialist lenders, and wealthy HNW private individuals. Our expertise as Structured Property Finance Specialists can help you with the complexities of bridging finance and find the best solution for your needs.
Why not get in touch today for personalised advice on your bridging loan options?
