The buy-to-let (BTL) and bridging sectors have always been interlinked and, historically, tended to ebb and flow with one another.

This is unsurprising given many borrowers use bridging loans to complete quickly on investment properties before flipping them onto a BTL mortgage.

However, when it comes to interest rates the two sectors have almost completely uncoupled since the start of 2022. So far this year we have seen BTL lenders rapidly re-price upwards as funding costs soared, whereas bridging lenders held firm on pricing for longer, accepting the squeeze on their margins.

Many lenders are operating on the thinnest of margins

In the BTL sector, the average loan rate is nearly 1.4 percentage points higher than at the start of the year, according to data firm Moneyfacts — and it is quickly rising. In the bridging market, on the other hand, monthly interest rates start from as low as 0.5% and have been falling since the start of the year. But why?

A major factor behind the divergence is simply that competition for business is fierce and the market is smaller. The product is, of course, more expensive and margins are higher but the same principles of profitability apply. Over the past few years there has been a surge in new entrants to the bridging market, which has put a natural cap on pricing.

Market share

There are just over 60 lenders competing in a BTL market that is expected to lend roughly £40bn to landlords this year, according to trade body UK Finance. But in the bridging sector an even greater number of lenders are fighting for a piece of a £5bn-a-year market, according to the Association of Short Term Lenders.

We must keep things in perspective. Loan rates have been at rock bottom, so were bound to settle back at more ‘normal’ levels eventually

Under such conditions, the net result is that a lot of bridging lenders — particularly the smaller ones — are afraid to increase their rates for fear of destroying their market share.

However, that position is quickly becoming unsustainable. We live in a world where the Bank rate is predicted to push past 5% next year, and lenders’ operating costs are higher in the face of soaring inflation and energy bills. This means many lenders are operating on the thinnest of margins and will have to move soon to avoid becoming loss making — if they aren’t already. When we speak with high-level board contacts at bridging lenders that haven’t already moved on pricing, they all say the same: they will have to do so.

We may see lenders impose stricter offer deadlines as a result of the sharp uptick in funding costs

That is already happening. In the past couple of weeks several key lenders have started to increase their pricing, via either rate card or higher trends in bespoke pricing. There may be others but it is harder to tell in bridging, where many lenders offer bespoke pricing on every deal and so don’t have a published rate card.

Many lenders say they will lend from 0.6% a month, for example, but it’s likely these rates are reserved for big-ticket deals of the highest quality in more stable times, so it will be interesting to see if such ‘from’ rates continue to be issued.

We may also see lenders impose stricter offer deadlines as a result of the sharp uptick in funding costs. As a result, borrowers will probably have to move more quickly to lock in their rate.

A lot of bridging lenders — particularly the smaller ones — are afraid to increase their rates for fear of destroying their market share

While that may sound bleak, we must keep things in perspective. Loan rates have been at rock bottom for much of the past decade, so were bound to settle back at more ‘normal’ levels eventually.

Of course, higher borrowing costs will cause pain for some but for others it could offer a great opportunity for buying assets in less of a seller’s market.

Lucy Barrett is founder and director of master broker Vantage Finance