Can Bridging Help to Resolve an Election-Induced Impasse?

Bridging Loans And The Election

As the general election approaches, we want to show you how short-term finance can give landlords more flexibility than standard BTL mortgages.

Although it’s a stretch to say the nation is experiencing ‘election fever,’ it’s undeniably the headline story currently, and not just on the political front.

The announcement of a general election has a clear impact on the mortgage market. Some potential buyers will undoubtedly pause their plans, preferring to wait and see the outcome and how it might affect their purchasing decisions.

Pricing is influenced as well. The Bank of England is highly unlikely to lower rates during an election campaign, regardless of the conditions, due to potential political ramifications.

This scenario poses challenges for landlords and property investors. Those dealing with buy-to-let mortgages have noticed a significant increase in costs when refinancing their existing loans.

Adopting a flexible strategy

Recently, many investors have chosen to utilise flexible short-term financing as an alternative approach.

The interest rates for bridging loans are comparable to those of traditional buy-to-let (BTL) mortgages, but they offer significantly more flexibility.

For instance, an investor might be planning to reorganise their portfolio by selling properties that aren’t generating satisfactory yields. According to the National Residential Landlords Association, approximately one-third of investors are considering reducing their portfolios, even though tenant demand remains strong.

Selling properties under a standard BTL mortgage can result in substantial exit fees, diminishing the profits from the sale.

However, if investors use bridging loans instead, they can sell their properties whenever they choose without incurring any exit fees.

Leveraging flexibility in financing

Investors greatly benefit from the flexibility that short-term financing provides when transitioning to long-term financing options. Whether the Bank of England reduces the base rate in the near future or further down the line, investors using bridging finance can seamlessly switch to more competitive BTL products when it’s financially advantageous, without the burden of exit fees.

Contrast this with the scenario where a landlord commits to a long-term BTL mortgage now, only to face significant refinancing costs 12–18 months later if rates drop and the advantages of bridging loans become clear.

The need for lender flexibility

This strategy is appealing to many refinancing investors, offering them enhanced control and flexibility. However, this flexibility must also be reflected by the lenders. Predicting rate changes is challenging, and while it appears likely that the base rate will decrease sometime in 2024—possibly by late summer—recent history has shown that such predictions can be unreliable.

An investor might plan to refinance into a BTL deal within a year, but unforeseen circumstances might necessitate a longer holding period. Many lenders limit their terms to 18 months, which can be restrictive. Feedback from brokers and clients indicates that the 24-month term offered by Tuscan is particularly appreciated. While most investors do not anticipate needing the loan for that long, they value the extended period as a cushion to wait for more favourable rates.

Investors prefer not to face the hassle of obtaining another bridging loan if BTL rates haven’t decreased as expected after a year.

Choosing knowledgeable lenders

This underscores the importance of working with lenders who truly understand the market and the needs of landlords. This expertise doesn’t happen by accident; it stems from extensive experience in the sector and close collaboration with brokers and their clients, leading to a deeper understanding of the most effective products and processes.

As 2024 progresses, bridging finance is likely to become even more attractive as a means to wait out high BTL rates. Brokers should focus on identifying lenders that offer the long-term flexibility their clients need.