The Bank of England has officially increased the base rate to 3%, the biggest rise since 1989, and naturally, the mainstream residential mortgage market is feeling the effects. For the estimated 2.2 million people currently on their lender’s Standard Variable Rate (SVR), this is bad news, but for those looking to secure a new mortgage, the picture is even more chaotic.
The events surrounding Kwasi Kwarteng’s mini-budget, and the eventual domino effect resignation of PM Liz Truss, led to a rollercoaster of rate rises, product pulls, and then a resettling when the arrival Rishi Sunak brought some semblance of stability to Number 10. Just as prospective borrowers might have breathed a sigh of relief, with key high street lenders reducing rates once again, the BoE’s announcement – while not unexpected – has reminded everyone that we are far from out of the woods yet.
Bank on bridging
While turmoil rages on the high street, however, bridging – and the specialist market in general – has remained quite steady.
Not completely insulated against the issues facing the rest of the property market, there have of course been some rate rises and product pulls in the short-term finance sector. Nevertheless, these increases have not been anywhere near as high as those seen in the residential and buy-to-let (BTL) term lending markets.
Indeed, some lenders are even continuing to lend at the same low rates seen before the recent mainstream spikes, with little sign of wavering from their current offerings. Of course, we have all learned the hard way that the only certainty is uncertainty in recent years, but for now, it does seem possible to remain cautiously optimistic about the stability of the bridging market.
The latest Bridging Trends, commissioned by MT Finance, shows that transactions hit a record high in the third quarter of 2022, with a 20% rise in activity, resulting in £214.7 million in transacted loans by contributors during Q3 alone. The average monthly interest rate for bridging loans did increase during this time, to 0.73%, but this followed a record low in Q2 of 0.69%.
Looking at the trends
The Bridging Trends data hints at some of the reasons why short-term finance has remained relatively steady, despite the uncertainty that abounds in the UK economy and property market.
For example, as house prices have soared and the cost of living has changed many people’s financial priorities, the use of bridging to purchase an investment property – the most popular use for the previous five quarters – dropped from 24% to 16%. This is an all-time low, reflecting the fact that an environment of tightened savings, high house prices, and painful interest rates has inspired caution among investors.
However, likely for much the same reasons, preventing a chain break took over investment properties as the most popular use of bridging, at 22% in Q3. Many purchase transactions will have been hit hard by the current challenges, not only affecting the buyers but the entire chain on either side of them. For borrowers still able to make their purchases, bridging can be a lifeline to keep transactions moving in a time of upheaval.
Meanwhile, short-term finance for business purposes has nearly doubled, from 6% to 11%, perhaps indicating that more people are using bridging loans to shore up their cash flow and finances ahead of a difficult period ahead.
Understanding the exits
While it is reassuring to be reminded of the ongoing stability and strength of the bridging market, this sector does not exist in a vacuum. It is one thing to help borrowers see that bridging could be the secret to unravelling a snarled chain-break, freeing up the finance for much-needed home refurbishments, or helping their business weather the storm, but they must also understand the importance of the exit, which more often than not means relying on the mainstream market.
If the exit route in mind is a term mortgage – residential or buy-to-let – it’s important to take into account rising rates, reduced product numbers, and tightening affordability criteria, in order to help borrowers avoid a nasty shock at the end of their bridge term.
The bridging market continues to offer good opportunities for brokers to help their clients on both regulated and non-regulated cases, but in the current environment, it’s more important than ever to ensure that advice is given based on a sound foundation of knowledge and experience. Working with a specialist distribution partner, like Brightstar, can help you to guide your clients through the complexity of the current market, and towards an exit solution that is right for them.
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