By Lucy Barrett, Managing Director, Aria Finance
2022 was something of a turning point for the UK property market. After a decade of rock-bottom interest rates and runaway house prices, everything changed last year.
In just 12 months, interest rates have leapt more than 3 percentage points, mortgage rates doubled and our once red-hot housing market cooled considerably.
While conditions have improved somewhat since September’s botched mini-Budget, there is no denying this is a very different market to what it was even just a few months ago.
But how much of a knock-on effect will these factors have on the bridging sector in 2023?
Rising interest rates and squeezed household incomes are expected to continue to act as a drag on the wider property market this year.
In fact, UK Finance, the trade body, believes this will lead to property transactions and gross lending slumping 21% and 15%, respectively, in 2023.
In a competitive housing market, we see more buyers looking to short-term finance to break a chain or from landlords looking to complete quickly on an attractive investment.
Therefore, in theory, a slowdown in the wider housing market should lead to less demand for bridging finance.
Secondly, lower volumes and rising interest rates in the first-charge and buy-to-let sectors may make exit strategies problematic for some borrowers.
The most popular exit strategies for many bridging loan borrowers are typically either the sale of the property or refinancing onto a long-term mortgage product.
However, offloading a property in a more pedestrian property market is likely to prove more difficult without compromising on the asking price.
We are also likely to see rising rates to lead to affordability issues for many homeowners, while landlords operating in areas where rents are less elastic may find they aren’t able to borrow as much as they used to. That could make some bridging deals unviable.
That said, the bridging market is holding up well at the moment. Figures from the Association of Short Term Lenders show lending was up 15.9% in the three months ending September compared to the previous quarter.
While we don’t yet have figures for the fourth quarter, I’ve seen little to suggest bridging market volumes are about to fall off a cliff.
In fact, the bridging market has one major advantage that could protect it against the worst of the current economic environment – intense competition.
While you’ll struggle to find an exact figure, there are literally dozens of lenders fighting for a share of what is only a £5 billion market.
Strong competition mean the bridging sector has proven far less rate-sensitive than the mainstream mortgage market, albeit rates have clearly crept North.
Data from the latest Bridging Trends survey shows the average bridging rate was 0.73% a month at the end of the third-quarter – a single basis point above where it was a year earlier.
By contrast, mainstream mortgage market rates rocketed around 180bps over the same period and are higher still today.
While I expect to see bridging rates drift higher in the coming months as lenders look to protect their margins, competition should act as a natural cap on rate rises to some extent.
For that reason, I feel bridging finance has the flexibility to withstand more turbulent times, although it’s clear lenders will naturally be more cautious on loan to values and exits as the market continues to cool.
I am also sure investors will continue to seek good value opportunities and require speed of transaction, which always lends itself well to the product. And where a planned exit is sale or there is genuine income uplift potential to make a refinance viable, then bridging can be available where no other form of funding is.
So, while observers are almost unanimous in writing off the housing and mainstream mortgage market’s prospects in 2023, the bridging market may surprise a lot of people.