Bridging products have proven to be more resilient than buy-to-let in the face of a higher interest rate environment.
That is according to specialist lender Octane Capital, which analysed Bridging Trends and Bank of England data to compare the rates between the two sectors.
It found that, in the space of just three years, bridging rates have gone from costing five and a half times a buy-to-let mortgage to less than two and a half times.
Buy-to-let vs bridging
In the fourth quarter of 2021, a time when the Bank base rate was just 0.1%, a typical 75% loan-to-value 2-year fixed rate buy-to-let mortgage cost just 1.67% annually. At the time average annual bridging rates came to 9.24%, five and a half times (5.53x) the cost of buy-to-let products.
These days however the picture is very different, as the current Bank base rate of 4.5% has pushed up buy-to-let rates.
As of Q4 2024 the equivalent 2-year 75% LTV buy-to-let mortgage now costs 4.28%. Bridging rates are less affected, as typical rates stand at 10.44% annually, less than two and a half times (2.44x) the cost of buy-to-let products.
This convergence between the two highlights the increased viability of bridging loans, which are rarely designed to be held for more than a few months at a time anyway.
Arrangement fees further boost bridging appeal
It’s also important to note that one of the key benefits of bridging finance is the lower arrangement fee when compared to buy-to-let borrowing. Typically ranging from 1% to 2%, an average arrangement fee of 1.5% on a bridging loan of £200,000 would cost just £3,000.
In contrast, the average buy-to-let arrangement fee of 4.75% would sit at £9,500 on a loan of £200,000 and whilst the interest paid on a bridging loan may be considerably higher, the life span of the loan rarely runs beyond 12 months, making it more affordable in the long-term.
So, when taking the cost of the arrangement fee into account alongside the interest paid, the initial cost of a buy-to-let mortgage climbs to £18,060 during the first year, driving the rate of interest up to 9%.
This brings it almost in line with the initial cost of a bridging loan during the same period, with the combined cost of the arrangement fee and interest paid totalling £23,880, or 11.9%.
Market conditions improving
Monthly bridging costs have dropped from 0.92% in Q4 2023 to 0.87% in the same quarter of 2024.
Buy-to-let rates are also getting cheaper, as 75% LTV 2-year fixed rate rates have fallen from 5.59% in Q4 2023 to 4.28% in Q4 2024, demonstrating that the current environment is becoming friendlier to various property investors than last year, whether using a bridge or a buy-to-let loan.
CEO of Octane Capital, Jonathan Samuels, commented:
“It’s been a more challenging environment for investors in the past few years, as a higher Bank base rate has made it harder to make a return.
“However, there’s evidence that bridging lenders are doing more than the mainstream market when it comes to keeping costs manageable for investors, as the difference in rate is closing compared to mainstream buy-let mortgages.
“Bridging can be used for more than just a traditional chain break, as the finance is increasingly popular for ambitious projects like heavy refurbishments.
“If you’re thinking of taking out a bridging loan, it’s worth speaking to an expert who can advise you on what is the more suitable form of finance for you.”
