"Bridging can be used for more than just traditional chain breaks. It’s increasingly popular for more ambitious projects, such as heavy refurbishments"
- Jonathan Samuels - Octane Capital
Bridging loans have shown greater resilience than buy-to-let products amid a higher interest rate environment, according to specialist lender Octane Capital. The lender analyzed data from Bridging Trends and the Bank of England to compare the rates between the two sectors.
In just three years, bridging rates have decreased from being five and a half times the cost of a buy-to-let mortgage to less than two and a half times.
Buy-to-let vs bridging
In Q4 2021, with the Bank base rate at just 0.1%, a typical 75% loan-to-value (LTV) 2-year fixed rate buy-to-let mortgage had an interest rate of only 1.67%. Meanwhile, the average annual rate for bridging loans stood at 9.24%, about 5.53 times the cost of a buy-to-let mortgage.
Today, the situation is quite different. The Bank base rate has risen to 4.5%, which has driven up buy-to-let rates. As of Q4 2024, the typical 2-year, 75% LTV buy-to-let mortgage costs 4.28%. In comparison, bridging rates have remained relatively stable, standing at 10.44% annually, just 2.44 times the cost of buy-to-let loans.
This narrowing of the gap indicates that bridging loans are becoming increasingly viable, even though they are generally designed to be held for shorter durations, usually only a few months.
Arrangement fees boost bridging appeal
Another significant advantage of bridging loans is their lower arrangement fees compared to buy-to-let financing. Bridging arrangement fees generally range from 1% to 2%. For a £200,000 bridging loan, this means an arrangement fee of about £3,000, assuming a 1.5% fee.
By contrast, buy-to-let arrangement fees average 4.75%, which would amount to £9,500 on a £200,000 loan. Although the interest rates on bridging loans tend to be higher, they are typically repaid within 12 months, making them more affordable over the short term.
When factoring in both the arrangement fee and the interest paid, the total initial cost of a buy-to-let mortgage can climb to £18,060 in the first year, effectively pushing the total interest rate to around 9%. This brings the cost in line with a bridging loan, where the total cost, including both the arrangement fee and interest, would reach £23,880, or an interest rate of 11.9% in the same period.
Market conditions improving
Bridging loan costs have dropped slightly, from 0.92% in Q4 2023 to 0.87% in Q4 2024. Buy-to-let rates have also decreased, with the 75% LTV 2-year fixed rate falling from 5.59% in Q4 2023 to 4.28% in Q4 2024. This signals a more favourable environment for property investors across both types of loans.
“It’s been a more challenging environment for investors in the past few years, as a higher Bank base rate has made it harder to make a return," commented Jonathan Samuels, CEO of Octane Capital. "However, there’s evidence that bridging lenders are doing more than the mainstream market to keep costs manageable for investors, with rates closing the gap between bridging and buy-to-let mortgages."
Samuels further noted, “Bridging can be used for more than just traditional chain breaks. It’s increasingly popular for more ambitious projects, such as heavy refurbishments.”
For those considering a bridging loan, Samuels advises, “It’s worth speaking to an expert who can help determine the most suitable form of finance for your needs.”
