Rate rise prompts bridging finance demand
The Bank of England’s surprise decision to raise interest rates from 0.1 per cent to 0.25 per cent on 16 December sparked a reappraisal of financial forecasts across the UK economy. It was the first rate hike since the onset of the Covid-19 pandemic and the first from any major economy’s Central Bank, raising the prospect of higher borrowing costs in 2022.
UK inflation hit 5 per cent in November, well above the BoE’s target of 2 per cent, thanks to surging energy prices, supply chain disruptions and Brexit. The end of the price cap on natural gas, expected in April 2022, could feed into a series of rises, as the Bank seeks to dampen inflation.
For property buyers and investors, the news acted as a signal to action: after years of near-zero interest rates, they’re desperate to secure good deals ahead of a new era of more expensive borrowing.
“As a broker, sometimes you’re waiting weeks or even months for clients to send you the right documents,” said one mortgage broker. “It was surprising how many of those documents made their way into my inbox on Thursday [the day of the BoE announcement].”
Compounding the effects of this scramble for finance, the property market is already unseasonably hot: demand from buyers in the final months of 2021 rose to historic highs, while supplies plummeted to matching lows. Estate agency association NAEA Propertymark announced supply figures of just 20 properties per branch, the lowest ever recorded. Buyer numbers are soaring and 38 per cent of properties changed hands for more than the original asking price in November 2021, compared with just 10 per cent across 2020.
“The pressure on the housing market and consequently house prices is continuing at an unrelenting rate,” said Propertymark chief executive Nathan Emerson in late December. “The level of demand is expected to continue into the first quarter of next year.”
A range of estate agents, surveyed in December 2021, predict that the roaring property market has further yet to run: Savills argues that house prices will rise 3.5 per cent in 2022, while Rightmove predicts 5 per cent.
Causes of the spike in demand include ongoing efforts by homeowners to find properties which suit their new working patterns, with more outdoor space and access to the countryside. Senior UK agents argue that these factors outweigh the end of the Stamp Duty holiday, introduced by the UK Treasury to counter the effects of the pandemic.
“House hunters are still looking for properties which are more flexible, spacious and rural than where they lived pre-pandemic,” said Nick Leeming, chairman of Jackson-Stops, with 40 offices across the UK. “We are still seeing buyers acting with intent and being driven by lifestyle aspirations as opposed to financial saving. Whilst low stock is likely to continue to drive the housing market in the first months of 2022, we anticipate that the upward movement in inflationary pressure will do little to dampen transaction volumes, and that these will remain stable heading into the new year.”
The hyperactive property market has kept bridging finance providers busier than ever. Gross lending by a group of 12 major specialist lenders during the third quarter of 2021 totalled £190.24 million, the highest figure since the final quarter of 2018, and a 65 per cent increase on the same period in 2020. Lending across the whole market will be a great deal more.
“These figures show that bridging finance is now a better understood product for many brokers and they have much more confidence in recommending this solution to their customers,” said one senior lender.
In tandem with higher demand, brokers note increasing requests for higher loan-to-value (LTV) bridging finance, with the average LTV in recent months hitting 60 per cent, compared with 54 per cent earlier in 2021. Some brokers report high demand for LTV above 70 per cent, “where clients keep as much equity as possible in their back pockets, for future investments,” said one.
Chain breaks and mortgage delays continue to be the most common bridging finance factors, followed by DIY and refurbishment projects (many prompted by work from home requirements). Borrowers acquiring properties at auction also form a high proportion of bridging finance customers, along with small companies aiming to raise capital. In both cases, rising interest rates pose a looming challenge, with residential bridging finance playing a potentially crucial role in securing assets at an optimum time and at a reasonable cost.
Bridging finance providers stress that, with flexible, adaptable products, they can respond to unexpected changes in regulation or market conditions. Should inflation continue to rise, as some commentators forecast, the Bank of England is likely to respond with further interest rate increases. Yet it is impossible to predict the timing of these with any certainty. Equally, the pandemic has defied repeated attempts to chart its progress in any straightforward way. Another new variant may be just around the corner.
In consequence, borrowers and investors who identify strong possibilities in a bull property market – UK house prices rose at the fastest pace in 15 years in the three months to December 2021 - with interest rate rises a constant probability, are well advised to consider bridging finance.
Several bridging finance providers have launched new products, serving buy-to-let borrowers for example, which have found an enthusiastic reception. One lender had more than £100 million worth of enquiries within two months of launching a new BTL product.
“We anticipate that this strong demand for bridging finance will persist into 2022, as the threat of further interest rate hikes, together with a continuing disconnect between supply and demand, drives activity in the property market,” said Stephen Clark at Finbri. “Where buyers and investors stand to lose out, due to the highly competitive market, or because their costs will be higher in future, bridging finance can offer a convenient and affordable solution.”