Expert reviews bridging transactions and the outlook for 2023
Bridging transactions have surged to their highest level in three years, despite the challenging economic backdrop which subdued other sectors of the mortgage industry, according to the EY Bridging Market Study 2023.
Marc Callaghan (pictured), head of specialist finance at OSB Group, said the healthy business levels over the past year were the result of strong demand for bridging finance, matched by plentiful funding coming into the sector.
Popular uses of bridging
The three most popular uses of bridging finance in 2022, according to the EY report, were refurbishment, business purposes and mortgage delays.
Refurbishment and business purposes were also the top two most common reasons for bridging identified by the EY surveys in 2022 and 2021.
Callaghan said mortgage delays entered the top three reasons for bridging due to market fluctuations following the Liz Truss mini budget last September, which caused widespread disruption and rapidly rising interest rates.
“This led to a rise in broken chains caused by mortgage delays, necessitating the use of bridging finance to get many deals through in the second half of the year,” Callaghan said.
While this was a difficult time for everyone, bridging came into its own and saved many transactions, he added.
Callaghan had witnessed regulated chain breaks continue into 2023, up to a point.
“However, the predominant reason borrowers are using bridging now and have used it for the last three years has been for refurbishment, and we expect demand to continue strongly in this area, particularly in the buy-to-let arena,” he said.
Landlords using bridging
The Landlord Leaders research OSB Group carried out in H2 2022, Callaghan said, revealed that 68% of landlords had or planned to invest in upgrading their rental stock to make it more energy-efficient ahead of any Energy Performance Certificate (EPC) rule changes.
“Buy-to-let refurbishment bridging loans, such as those we offer through Precise Mortgages, can be ideal for funding such projects,” Callaghan said.
The application-to-completion process can be quick, so Callaghan said landlords could get necessary improvements done at speed, minimising the impact on tenants.
He added that landlords also had the option of paying off the funding in the short term or extending the term.
“The potential of bridging allows for short-term borrowing which was particularly attractive to investors given the market volatility at the back end of 2022,” Callaghan said.
Investors could get the necessary work or deal done quickly at the time, and wait for the market to settle and rates to stabilise, before considering their long-term mortgage options.
“Bridging offered a great advantage in buying clients time on their investments,” he added.
Looking ahead
Callaghan said the markets were looking calmer for the rest of 2023, but he was still anticipating healthy levels of demand for buy-to-let refurbishment and developer exit bridging finance, given landlords’ appetite for upgrading their properties.
“If the proposed Energy Performance Certificate (EPC) rules are introduced, that should further boost demand for bridging finance,” he said.
The sector itself, Callaghan said, had been professionalising for some years, with key, experienced lenders, offering bridging solutions to a wide range of borrowers and investors via an expanding cohort of well-informed brokers.
“At OSB Group, we will continue to promote the bridging sector and educate the market in how successful this type of finance can be when used correctly, with the help of our broker partners,” Callaghan said.
What are your expectations for bridging volumes over the course of 2023? Let us know in the comment section below.
