In this credit FAQ, S&P Global Ratings takes a closer look at granular residential bridging lending in the U.K. We summarize the current market structure, possibility of bridging loan securitizations, our analytical considerations, and key structural features.

Frequently Asked Questions: Market Summary

What is a bridging loan?

It is a type of finance intended to be short-term in nature, which the borrower intends to replace, in the short term, with a longer-term loan or repay the loan if certain events occur. For example, the sale of the property. Bridging loans are common in all types of secured lending. Note that the term "bridging loan" is used in various situations and these loans finance different properties, which present distinct risks.

How are bridging loans used in the U.K.?

Bridging loans have many specific use examples and usage differs from case to case (see chart below). A bridging lender for a residential bridging loan may be able to lend faster than a high street mortgage lender to complete a loan, allowing the borrower to beat other potential purchasers to acquire a property in a high demand area. In this example, the borrower may have two mortgages on two separate properties up until the time it can sell its first house.

Other uses include finance provided to modernize and renovate property with a view to selling the renovated property to pay off the loan--often referred to as "fix and flip" or "residential transition loans".

What is the difference between refurbishment finance and development financing?

Development finance may be also viewed as a bridging loan. However, development finance differs from refurbishment finance in that it is generally "ground up" development, in other words it generally involves building a property from scratch. Refurbishment finance is generally viewed as more "roof down," meaning that it generally involves refitting or a limited scale extension of an existing property. Subsequently, development finance carries more significant completion risk.

Are bridging loans regulated?

Generally speaking, they are not regulated, except for regulated residential bridging (RRB). A loan is classed as RRB if the borrower or close family intends to live in the mortgaged property. An example of RRB is a borrower looking to break a home purchase chain and take on two loans on two properties simultaneously, with a view to selling one property and using the proceeds to pay off one loan as soon as possible. In RRB the lender may need to consider the borrower's ability to afford the interest on both loans in much the same way it would for a standard owner-occupied residential mortgage (see the question: "What factors do lenders consider when underwriting a bridging loan?").

Are all bridging loans first lien?

No, second lien bridging is also common. Like first lien bridging, careful consideration needs to be given to the specifics of the use of the proceeds and how the loan is underwritten. At one end of the risk scale, a second lien bridge may be driven by a very short-term need for cash to a borrower with a very low loan-to-value ratio. On the other, the loan proceeds may be used to clear arrears on the first lien loan, with a view to preventing repossession.

Have there been any bridging loan securitizations?

In a European setting bridging loan securitizations are not unprecedented, with securitizations of bridging loans in Spain. Further afield, the U.S. has also seen these securitizations. In the U.K., we understand issuance has been private. However, as bridging lenders have wanted to increase their funding diversity, enquiries on potential securitizations have increased. Although many bridging lenders lack the scale to efficiently use securitization technology, some do.

How are bridging lenders currently financed?

Smaller banks and nonbank lenders tend to dominate bridging lending, given the relatively intensive underwriting burden relative to other lending types. Smaller bridging lenders may be solely equity funded or funded by private debt. Larger, nonbank lenders often adopt a warehouse funding model. Entities such as larger banks and credit funds provide warehouses, which are typically structured as a simple securitization with the lender funding an equity portion and a senior note representing the finance provider's portion. These warehouses are revolving, structured with suitable "stop purchase" triggers if creditworthiness deteriorates.

How big is the U.K. bridging market?

Given most lending is unregulated and banks form only part of the market, figures on the market's size should be regarded as best estimates. The Association of Short Term Lenders (ASTL) estimated advances by their members to be £7.6 billion at the end of 2024 (see chart 1). Growth phases of bridging lending generally correlate to periods of property price growth. Price growth, amongst other things, generates confidence property investors need to take on additional projects.

What does a typical bridging loan look like?

Maturity profile.   Loans tend to be short-term, with maturities often below 24 months (often less than 12 months). Maturities are often set based on an initial estimate on how long the refinancing mechanism may take to complete. Given that predicting the exact timing of an exit is difficult, bridging loans can be prepaid. The costs to the borrower of doing so will differ by lender.

Interest payment.   Interest is often not paid until the loan is repaid. Accordingly, the borrower makes no ongoing loan servicing payment until maturity. If a refinancing opportunity fails to materialize by the maturity date, the lender may extend the loan at its discretion. Consequently, the amount a lender will advance is often calculated as the maximum amount the lender will be prepared to lend, less the interest expected to be accrued at the loan's maturity. For example, if a lender anticipated an exposure of £500,000 on a loan and it was prepared to lend for two years at 10% each year. After two years £100,000 of interest will have accrued. The closing advance amount would be £400,000 (maximum exposure of £500,0000 less expected interest accrual of £100,00).

Loan-to-value (LTV) ratios.  LTV ratios vary based on the lending proposition and the nature of the security. Overall LTV ratios for bridging products tend to be in the 50%-70% range. Security properties considered to be potentially illiquid, such as heavy refurbishment, would generally have LTV ratios at the lower end of this range. Therefore, borrowers typically have material equity in the property.

Interest rates.   Interest rates tend to be high and given their short-term nature are expressed as monthly rates but would typically translate to low yearly double digits and vary based on the loan's risk profile. Rates are usually agreed at the start of the loan and are fixed, given the lender does not often hedge the short duration of the loans.

Analytical Considerations

What factors are expected to underpin bridging loan performance?

Factors that affect general macroeconomic wellbeing, such as unemployment and GDP growth, will also affect bridging loans' performance. However, depending on the type of bridging lending, other factors will affect performance more than in standard high street mortgage lending. For example, spikes in raw material and labor costs will restrict any lending where completion risk exists, such as heavy refurbishment bridging. Also, given the short-term nature of the bridging and its concentrated maturity profile and interest-only nature, bridging transactions are more exposed to a lending market disruption when the bridging loan is due for refinancing than a standard RMBS transaction.

What factors do lenders consider when underwriting a bridging loan?

The underwriting process differs by property type and exit route, but two main differences stand out. Firstly, the repayment of most bridging loans relies on an exit plan. Its plausibility is key to an underwriting decision. Secondly, lenders have different approaches on how they are underwriting the loan proposition and underwriting the borrower and proposition combined. For example, lenders who view a combination of the proposition and the borrower will look to ensure the lending proposition they are lending to stands on its own merits. They will also look beyond that at the borrower's wider financial means to assess its repayment capacity in case the planned exit route does not materialize. Lenders, who focus more on the lending proposition may not consider the borrower's financial means beyond a general creditworthiness assessment.

How do lenders value bridging loan properties?

Valuation protocols differ according to the lender and property type. As speed is a factor in some bridging loan decisions, lenders use valuation techniques such as desktop valuations for some more straightforward propositions.

Lenders often value refurbishment finance based on the property's gross development value (GDV). The GDV is broadly the property's expected value if it was completed on the valuation date. As bridging loans are unregulated a lender can choose to value using any method it and its funders see fit. This means that valuation of the same property may differ by lender, making assessing relative risk in bridging loan portfolios challenging.

How do bridging loans perform?

As with any credit business, lenders will want to understand how their loan portfolios are performing and performance data are available. However, the nature of bridging lending means that users of this data need to consider several factors when interpreting the data.

Firstly, performance will differ according to the type of bridging lending, for example, light refurbishment versus heavy refurbishment. Accordingly, we would expect that performance data can be provided in a format that would facilitate an analysis of relative risk between product categories. This is relevant not only to estimate default probability but, given some types of bridging loans have element of construction/completion risk, and loss severity.

Secondly, as mentioned, bridging loans' performance is expected to correlate to a wider range of factors than a typical residential mortgage. Therefore, the data compilation period needs to be considered when interpreting the future predictive power of that data.

Thirdly, the definition of defaults used when presenting performance data needs careful consideration. We have highlighted that lenders often extend maturities at their discretion if an exit route is taking longer than initially expected to materialize. Refinancing and general economic conditions that facilitate loan extensions may not exist in a period of market stress. In addition to default/delinquencies performance, data on aspects such as costs and recovery timings by bridging loan type will also be relevant.

How would you analyze a transaction secured by bridging loans?

Our methodology for assessing residential mortgage loans in the U.K. currently envisage increases to estimated default probabilities for loans that would generally be classified as RRB. The factors highlighted in this report, such as performance data availability and its interpretation make the assessment of other bridging lending types more complex, and we would therefore assess these case-by-case.

Structural Considerations

What are some structural characteristics of bridging loans?

Short duration leads to a very short weighted-average life.  Loans typically have initial maturities of less than one year which would lead to a weighted-average life of under a year in a normal environment. The likely solution to this, given that most bridging warehouses are structured in this way, is that a public securitization would have a revolving feature where the lender can sell in additional assets to the transaction subject to performance triggers not being breached. The calibration of the triggers that control this will be key in determining any rating outcome.

Interest collection often relies on a successful exit or liquidation.  As previously highlighted, many bridging products only pay interest when the loan is repaid. This means that any disruption affecting the exit of the loan and/or the repossession and liquidation process will potentially significantly affect the issuer's ability to pay interest. Structurally, this can be overcome, as in a standard RMBS transaction, by features such as deferrable notes and external liquidity.

Flexible draw loans.  Certain bridging products allow additional advances when certain work, usually certified by a surveyor, is completed. Although the concept of further advances is not uncommon in typical RMBS transactions, such features potentially create setoff risk (if any future funding becomes the issuer's obligation if the issuer does not fund the advance).

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