Bridging rates are set to rise but opportunities abound
By Thomas, Head of Bridging Finance, West One Loans
If you regularly follow the mainstream mortgage trade press, product rate rises are dominating the deadlines at the moment.
However, that has not been the case in the bridging sector. Quite the opposite, in fact.
Whereas mainstream owner-occupied and buy-to-let mortgage rates have been rising en masse, they have actually been falling in our sector.
According to the latest quarterly Bridging Trends update, bridging rates hit a record-low of 0.71% a month in the first quarter, down from 0.77% in the last three months of 2021.
There are a number of reasons why that is the case, but perhaps the most important is the intense competition between lenders.
I met with a firm the other day that claimed to have more than 190 lenders on their sourcing system. That is an enormous number for a market that achieved a little more than £4.3bn of lending in the past 12 months.
To put that into context, there are around 64 lenders operating in the mainstream market, according to trade body UK Finance, which achieved roughly £316bn of gross lending last year.
Some of those are, of course, relatively large operations and some are very small. Which brings me onto the next reason why the bridging rates have been falling.
Not only does the bridging market have a large number of lenders, which increases competition, it is also incredibly diverse when it comes to funding sources.
Mainstream non-bank lenders tend to operate the same model: secure a funding line and warehouse facility from an asset manager, lend the money, securitise, replenish the warehouse facility.
While many of the larger bridging lenders operate in a similar way, there are plenty of firms out there using peer-to-peer models or private money, which helps sustain lending levels when conditions in the wholesale market deteriorate.
Lastly, a lot of bridging lenders have non-utilisation costs, which mean that ultimately they get charged for funding they decide to sit on. Therefore, it makes sense to lend that money, even at a lower rate.
It is this combination of factors that is currently sustaining lending levels and keeping rates low. However, I do feel that the current situation cannot last indefinitely.
Lenders – big and small – are suffering from squeezed margins following the Bank of England’s decision to hike rates five times since December.
At the start of the pandemic, in Q2 2020, the average bridging rate was 0.85% -- 14 basis points higher than it is now. But now we have Bank base rate at 1.25%.
So we have a situation where bridging rates are falling but funding costs are rising, leaving lenders to shoulder the added cost at a time when margins are already wafer-thin.
Clearly, that is unsustainable long-term, and therefore it is likely we will see bridging rates rise in the coming months in the same way they have in the mainstream market.
The obvious question is what effect that will have on demand – and in that regard I am very optimistic.
Regardless of what happens to rates, demand for finance will remain high in the bridging space, particularly for commercial and development finance, which will be the biggest growth areas over the next few years.
UK cities are going through a once-in-a-generation reinvention, with people viewing them and using them in a different way to how they once did.
With the High Street struggling, planners and councils are trying new ways to pull people into city centres.
As a result, we are seeing an explosion in the number of once-commercial premises being repurposed as residential developments, community hubs or other innovative new use types. That lends itself enormously to the bridging sector.
The Government’s levelling-up agenda and its drive to make the nation’s housing stock more energy efficient will also throw up huge new opportunities for the sector.
So while it’s quite easy to see the negative side of impending product rate rises, it’s important we also see the enormous opportunities available to our sector.
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