Bridging Watch: Conscious Recoupling? | Mortgage strategy


The buy-to-let (BTL) and bridging sectors have always been linked and historically have tended to fluctuate with each other.

This is not surprising given that many borrowers use bridge loans to quickly finish their real estate investments before switching them to a BTL mortgage.

However, when it comes to interest rates, the two sectors have almost completely decoupled since the start of 2022. So far this year, we’ve seen BTL lenders rapidly reassess prices higher as costs financing soared, while bridge lenders remained firm on prices longer, accepting the compression of their margins.

Many lenders operate with the thinnest margins

In the BTL sector, the average loan rate is almost 1.4 percentage points higher than at the start of the year, according to data firm Moneyfacts – and it is rising rapidly. In the relay market, on the other hand, monthly interest rates start from 0.5% and have been falling since the beginning of the year. But why?

A major factor behind the divergence is simply that the competition for business is fierce and the market is smaller. The product is of course more expensive and the margins are higher but the same principles of profitability apply. Over the past few years, there has been an increase in the number of new entrants to the bridge market, which has imposed a natural ceiling on prices.

Market share

There are just over 60 lenders competing in a BTL market which is expected to lend around £40billion to owners this year, according to trade body UK Finance. But in the relay business, an even larger number of lenders are battling for a share of a £5billion-a-year market, according to the Association of Short Term Lenders.

You have to keep things in perspective. Lending rates have been at their lowest, so they should return to more “normal” levels over time

Under such conditions, the net result is that many bridge lenders – especially smaller ones – are afraid to raise their rates for fear of destroying their market share.

However, this position quickly becomes untenable. We live in a world where the bank rate is expected to exceed 5% next year and where lenders have higher operating costs in the face of soaring inflation and soaring energy bills. This means that many lenders are operating on the thinnest of margins and will need to act soon to avoid becoming loss-making, if they are not already. When we speak with high-level contacts on the board of directors of bridge lenders who have not yet changed their pricing, they all say the same thing: they will have to.

We could see lenders imposing stricter offer deadlines due to the sharp increase in financing costs

It is already happening. Over the past couple of weeks, several key lenders have started raising prices, either via rate card or bespoke price uptrends. There may be others, but it’s harder to tell in bridging, where many lenders offer bespoke prices for each transaction and therefore don’t have a published rate card.

Many lenders say they will lend from 0.6% per month, for example, but these rates are likely to be reserved for the highest quality, large transactions in more stable times, so it will be interesting to see if these “from” rates continue to issue.

We could also see lenders imposing stricter offer deadlines due to the sharp increase in financing costs. As a result, borrowers will likely need to act faster to lock in their rate.

Many bridging lenders – especially smaller ones – are afraid to raise their rates for fear of destroying their market share

Although it may seem gloomy, we must keep things in perspective. Lending rates have been at rock bottom for much of the past decade, so were expected to return to more “normal” levels eventually.

Of course, higher borrowing costs will cause difficulties for some, but for others it could present a great opportunity to buy assets in a less bullish market.

Lucy Barrett is Managing Director of Aria Finance

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