Bank Rate change Impact

Using Bridging Finance for combatting bank rate uncertainty

It just goes to show how much the environment for the UK specialist lending sector has changed over the past two years when many are celebrating the fact that the Bank Rate has been left unchanged by the Bank of England’s Monetary Policy Committee (MPC) for two consecutive months.

With the Bank Rate currently at 5.25%, it almost seems incomprehensible that at the beginning of November 2021 it was 0.1%, where it had been for 18 consecutive months. Following that, inflation took hold in the UK economy and with interest rate policy being the MPC’s main weapon against rising prices.  The Bank Rate was steadily increased, month by month.

It’s against this backdrop that many are looking at the two consecutive Bank Rate holds and hoping that we’ve reached the peak for interest rates.  Indeed, since the most recent MPC decision, the annual inflation rate was revealed to have fallen sharply in October to 4.6%, following cheaper gas and electricity prices.  This means inflation is at its lowest level for two years and is lower than the 4.8% figure predicted by a Reuters survey of economists.

Is inflation under control?

Of course, this could well mean that we are now starting to see an inexorable fall in the rate of inflation, but equally it could be a false dawn. It’s worth remembering that the most recent MPC decision was spilt 6-3, with three members of the committee voting to increase Bank Rate by 0.25 percentage points to 5.5%, so it’s not clear that the Bank’s top economists believe inflation is under control.

The cost of borrowing is of course linked to the Bank Rate, but in specialist lending it is an indirect one, with swap rates having much more of a bearing on the cost of funds for specialist lenders, so it would been prudent, therefore, to conclude that there really isn’t any certainty over what borrowing rates are going to do in the short-term. With buy-to-let borrowers and property investors struggling to deal with affordability, it would be great if brokers could give them some news and inform them that conditions are going to improve, but we simply don’t know that this will be the case.

Dealing with buy-to-let affordability issues

There are many brokers with clients who are facing the prospect of remortgaging onto a much higher rate than their current deal, which for many may be extremely problematic. They might not be able to tolerate the increase in repayments, while some may be looking at being unable to pass lenders’ tougher stress tests, failing affordability assessments. For some, they may conclude that they need to sell up – and quickly.

In such situations, an alternative is bridge finance.   An unregulated bridging loan can provide a landlord/property investor with breathing space so they can work out their preferred longer-term option once they have a better idea of what is happening with borrowing rates. Ideally, buy-to-let term rates will continue to fall and in six to 12 months’ time landlords can remortgage onto better rates, passing affordability assessments.

Alternatively, they may conclude that the dispersal of property/properties is their best strategy, but will more likely get a better price than if they sold under duress.

Bridge finance has many uses, but sometimes it is ideal for simply bridging the uncertainty gap.   Landlord clients will welcome the breathing space.