The latest market analysis by mortgage experts, Revolution Brokers, suggests that this rise in bridging loans, combined with a significant rise in the average Loan-to-Value, highlights the growing volatility in the housing market.
Base rates
The Bank of England sets and changes its base rate in order to keep a handle on inflation. If inflation rises, so too does the base rate. As a result, borrowing money becomes more expensive. At the end of 2021, the base rate was increased to 0.25% to try and combat the economic turmoil resulting from the COVID-19 pandemic. Since then, it has gradually increased to today’s rate of 3%.
Not only is total bridging lending on the up, but the average Loan-to-Value (LTV) has also increased significantly since the beginning of the base rate rises.
Today’s average LTV is 59.6%. While this is an annual decline of -0.6%, it marks a quarterly rise of 3.5% and an increase of 2.3% since BofE base rates started rising. This demonstrates the impact of rising base rates on homebuyers and means that people are now borrowing more than they were during the height of the pandemic.
Why are bridge loans on the rise?
The most common reason for a homebuyer to take out a bridging loan is a chain break.
22% of all bridging loans taken out in Q3 2022 were the result of a broken chain which is 4% higher than at the end of 2021. Another contributor to the rise in borrowing is unregulated refinance which currently accounts for 13% of all bridging loans; 8% more than Q4 2021.
Usually, another common reason to take a bridging loan is to aid the purchase of an investment property. While investment properties are currently the second-most common reason for taking out a bridging loan, the 16% of all loans they account for marks a -13% drop compared to Q4 2021 and a -8% drop in the past quarter alone.
This suggests that, in the midst of economic uncertainty and the cost of living increases, people are choosing to avoid spending money on investment properties.
Almas Uddin, Founding Director of Revolution Brokers, commented: “At a time when investment purchases are dropping but total bridging loan lending is on the rise, it’s reasonable to conclude that the housing market has become increasingly volatile in recent months.
"The rise in broken chains, for example, could partially be because many buyers are taking a look at living costs and rising mortgage rates and having second thoughts about imminent purchases, pulling out at the eleventh hour.”
