Bridging loans are emerging as a more robust option for property investors compared to buy to let mortgages in today’s higher interest rate landscape, one specialist lender says.

According to Octane Capital, which examined bridging trends and Bank of England figures, there was a significant narrowing of the cost gap between the two financing methods over the past three years.

In late 2021, when the BoE’s base rate stood at 0.1%, a standard 75% loan-to-value (LTV) two-year fixed buy to let mortgage carried an annual rate of 1.67%.

By contrast, bridging finance averaged 9.24% annually, making it over five times costlier.

Fast forward to Q4 2024, with the base rate now at 4.5%, the same BTL mortgage costs 4.28%, while bridging rates have risen only slightly to 10.44%.

This reduces the cost disparity to less than two and a half times, highlighting bridging loans’ relative stability.

Challenging for investors

The lender’s chief executive, Jonathan Samuels, said: “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.

“However, there’s evidence that bridging lenders are doing more than the mainstream market when it comes to keeping costs manageable for investors, as the difference in rate is closing compared to mainstream buy to let mortgages.”

He added: “Bridging can be used for more than just a traditional chain break, as the finance is increasingly popular for ambitious projects like heavy refurbishments.”

Mr Samuels says that investors thinking of taking out a bridging loan should speak with an expert who can advise on the most suitable form of finance.

Lower fees for bridging

Bridging loans, which are typically held for short periods, benefit from lower arrangement fees.

For a £200,000 loan, a bridging arrangement fee of 1.5% equates to £3,000, compared to a BTL fee of 4.75%, or £9,500.

When combining interest and fees, the first-year cost of a buy to let mortgage reaches £18,060, equivalent to a 9% rate.

A bridging loan, meanwhile, totals £23,880, or 11.9%, making the two options nearly comparable for short-term financing.

Monthly bridging costs have also fallen, dropping from 0.92% in Q4 2023 to 0.87% in Q4 2024.

Buy-to-let rates have also eased, falling from 5.59% to 4.28% over the same period, signalling a more favourable environment for property investors.

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