Bridging mortgages – how the sector is developing

The bridging finance sector has come a long way in recent years and, as is often the case, it is new lenders coming to market that have increased competition, which in turn has driven the development of products and their range of features.

Bridging has historically had the reputation of being the option of last resort among mortgage brokers, given the perceived high interest rates and associated fees.

However, Jo Breeden (pictured), managing director of Crystal Specialist Finance, said it is a new breed of products, the events of recent years and bridging lenders’ nimble responses, that has changed that.

The new world of work

Breeden said the first notable reason for change was COVID, with the pandemic having a profound effect on the working lives of many. From becoming self-employed, to zero hour contracts, to short term contracts, to reducing hours or working part-time, Breeden said our patterns of work have changed.

“COVID also impacted the credit histories of many with the odd payment missed here and there blemishing what could have been a previously impeccable record,” he added.

Breeden said high street mortgage lenders do not look favourably on either ‘irregular’ income or a less than perfect credit score.

This in turn has made it increasingly difficult for many borrowers to secure traditional mortgages, and he said bridging has filled some of this gap as the lenders’ focus is on the value of the property, rather than the borrowers’ income sources or credit files.

“Bridging can provide borrowers with breathing space to secure ‘full time’ employment or repair their credit histories, enabling them to switch to a residential mortgage in the near future,” Breeden said.    

Rising interest rates and ‘Trussonomics’

Secondly, Breeden said there were the increases to the Bank of England base rate across 2022, as well as gilt price falls.

“The base rate rose steadily across 2022 and before the ‘mini budget’ in September, it was 1.75%,” Breeden explained. He noted ‘Trussonomics’ immediately sent the gilt markets spiralling as institutions lost confidence in the government’s fiscal controls. As swap rates, which are used to fund fixed rate mortgages, are influenced by gilt rates, they also spiralled, and Breeden added this saw lenders withdraw products and fixed terms rocketed above 6%.

“The Bank of England stepped in, buying gilts to try to stabilise the market and by October 17, Liz Truss was gone and Jeremy Hunt reversed the majority of the mini budget, but there were still no fixed term deals below 5%,” Breeden said.

In the intervening few months, Breeden said the markets reacted positively to a stability of sorts and the cheapest five-year deals are now just below 4% on a 60% loan-to-value (LTV) - but he added that this is still a far cry from the close to 1% five-year deals available at the start of 2022.

Due to their funding mechanisms, Breeden said rates on bridging finance have been stable and start at around 0.45% per month at present, with a 2.5% product fee, so the annualised rate is around 5.4%.

“While this is higher than the 4% of a fixed term deal, many borrowers are hedging their bets at the moment, believing that fixed term rates will fall further as stability in the UK economy continues and inflation falls,” he said.

Rather than committing for the next two to three years, Breeden said some borrowers are utilising the competitive rates and flexibility of bridging, as loans can be secured for up to 24 months and repaid at any time, without penalty.  

Buying opportunities

While much of the market instability of ‘Trussonomics’ is behind us and the premium pricing it created has largely gone, Breeden said it is still impacting the broader housing market.   

“Homebuyers and home movers have lost confidence, asking prices have fallen, and it is a buyers’ market,” he said.

Having said that, Breeden added that March data from Halifax showed the average house price went up by 0.8%, and so he believes the downward trend of the last few months may have come to an end. “The buy-to-let market is still reeling though as landlords continue to struggle to meet lender ICRs, as rental incomes cannot keep pace with rising mortgage repayments,” he added.

Breeden said this is creating buying opportunities on two fronts; firstly adventurous homebuyers are looking to auctions to pick up bargain ‘do-er uppers’, and portfolio landlords are doing the same as ‘accidental’ landlords sell up.

“In both cases, bridging finance is the ideal vehicle as it can be used to purchase uninhabitable property, that high street lenders will not consider, and secured within auction houses’ timeframes,” he said.

Breeden believes it can additionally help landlords who are looking to improve their yields by converting property into HMOs, as bridging finance is commonly used to fund conversion projects.                

Bridging is booming

“Our current economic situation and housing market are ideally suited to bridging,” Breeden said.

In Q1, he said bridging enquiries from brokers were up 33% year-on-year for his firm, and this echoes what brokers stated in the lender’s 2023 predictions survey, when 35% were planning to diversify into bridging this year.

While normality may return to the housing market later this year as interest rates soften a little more, Breeden said we are now in a very different world to the one pre-COVID and the ill-fated mini budget.

Breeden said the days of 1% fixed term mortgages are gone, and he added that high street lenders have had to tighten their criteria.

“The combination of competitive rates, flexible features and lenders constantly looking to meet the needs of the shifting marketplace, point to the continued growth and popularity of bridging finance,” he said.          

Do you believe the bridging market can play a significant role in assisting borrowers during this difficult period economically? Let us know in the comment section below.