Bridging sector likely to bust £1bn barrier

Low interest rates are making bridging loans an attractive option for buy-to-let landlords with ambitious schemes that high street lenders are reluctant to fund.

The latest version of our Bridging Index showed the average rate on a bridging loan dropped from 1.64% in 2010 to 1.41% in 2011.

The bridging sector is more liquid than the rest of the mortgage industry, where uncertainty in the wholesale markets is pushing up lenders’ funding costs and raising monthly rates. Nor is the sector subject to the same liquidity squeeze as the high street.

With its funds performing strongly, investors continue to put money in the sector. This keeps rates low and gives brokers access to different funding lines.

This is encouraging more borrowers to take out loans, as indicated by the volume of loans rising 62% between 2010 and 2011.

The average loan size increased 28% in the same period, rising to £301,000, which suggests lower rates are also boosting the average amount investors want to borrow.

And lower rates are tempting more residential investors to go for bridging loans. In 2011 84% were for residential projects, compared with 77% in 2010 and 70% in 2009.

Our analysis showed 67% of brokers expect rates to fall or hold in the next six months. We think they’re right.

If our projections are correct, our next Bridging Index later this month will show that low rates have helped push the value of the sector through the £1bn mark.