Bridging the gap of uncertainty

It is no secret that some buy-to-let (BTL) investors have faced tough times recently.

While we have seen rates in the BTL market come down in recent months, any investor remortgaging off a 2- or 5-year fixed-rate deal today faces paying rates around 3% higher.

The average 2-year fixed rate has risen from 2.92% in October 2021 to around 6.40% in October 2023, while the average 5-year fixed rate has followed a similar pattern, nearly doubling from 3.40% in October 2018 to 6.32% in October 2023, Moneyfacts figures show.

While some investors may be able to withstand the rise in repayments, others risk not being able to meet lenders’ increased stress tests, potentially falling short of the affordability assessment. In the worst-case scenario, they may have no choice but to switch to their lender’s Standard Variable Rate (SVR) – ironically, at an even higher interest rate.

For such investors, a bridging loan could provide a solution.

While we typically associate bridging loans with property purchases or renovations, they can effectively also bridge any financial gap.

Although the bridging market has not been immune to rising rates, similar to other segments of the mortgage market, it may still be a more cost-effective option than switching to a potentially higher SVR.

Given that some loans can be taken out for up to 18 months, for BTL investors nearing the time for remortgage, a bridging loan could provide them with the additional time needed to deliberate and consider their options – whether that be selling their property/properties in a more stable market climate, or remortgaging further down the line.

There is a growing consensus that we have reached the peak or are nearing it in terms of rate hikes, given that since the end of 2021, we have seen 14 increases in the Bank of England’s base rate.

While waiting for the base rate and subsequent mortgage rates to decrease can be a risky move for investors, one advantage of our bridging loans is that they do not incur an Early Repayment Charge (ERC) after the initial three months. This means landlords can quickly change course if their plans change.

Given the more favourable stress tests for five-year fixed rates and the preference for longer-term fixed-rate options in the BTL market, there may also be some landlords who pass the remortgage stress test but are reluctant to commit to a five-year fix at the current rates.

Even for those landlords who are eager to sell, there may still be some merit in waiting for a more buoyant market.

Increased mortgage costs and the cost of living have eroded some buyers’ confidence over the past year. While there is no doubt that we will end the year with lower house prices, the general sentiment is that property prices will start to climb again towards the latter part of 2024. Savills is currently predicting an overall house price decline of 10% in 2023 but gains of 1% in 2024 and 3.5% in 2025.

With it looking like there is going to be no significant improvement in the interest rate situation for BTL investors in the near future, brokers and lenders have to think innovatively for those struggling to remortgage. A bridging loan could be a suitable solution, providing investors with the extra thinking space required to explore the possibility of refinancing or selling in a stronger market down the road.

Anna Lewis is commercial director at Castle Trust Bank