Bridging finance has shown greater resilience than buy-to-let (BTL) mortgages amid elevated interest rates, with the cost gap between the two narrowing considerably over the past three years.

Analysis by specialist lender Octane Capital, drawing on Bridging Trends data and Bank of England figures, reveals that while bridging loans were once significantly more expensive than BTL mortgages, the difference has become far less pronounced.

In Q4 2021, with the Bank Rate at a historic low of 0.1%, a typical 75% loan-to-value (LTV) 2-year fixed BTL mortgage carried an annual interest rate of 1.67%, compared to 9.24% for an average bridging loan – a ratio of 5.53 to one.

By Q4 2024, the Bank Rate had risen to 4.5%, driving BTL mortgage rates higher. The same 75% LTV 2-year fixed mortgage now costs 4.28% per annum, while bridging rates stand at 10.44% — reducing the cost differential to 2.44 times.

The data highlights how bridging loans, typically used for short-term funding and repaid within months, have been less sensitive to broader movements in base rates. This has improved their relative appeal for investors seeking flexible finance solutions.

SHARPENED APPEAL

Arrangement fees further strengthen the case for bridging finance. While bridging loans typically incur fees of between 1% and 2%, a 1.5% fee on a £200,000 loan would result in an upfront cost of £3,000.

In contrast, the average arrangement fee on a comparable BTL mortgage is 4.75%, or £9,500 on the same loan size.

The short-term nature of bridging often makes the overall cost more manageable.

Though bridging interest rates remain higher, the short-term nature of such loans often makes the overall cost more manageable.

Including fees and interest, the total cost of a BTL mortgage over the first year reaches approximately £18,060, implying an effective rate of 9%. For bridging, the equivalent total cost would be £23,880 – or 11.9% – narrowing the gap significantly compared to previous years.

CONDITIONS STABILISING

There are signs of improving conditions across both sectors. Average monthly bridging costs have fallen from 0.92% in Q4 2023 to 0.87% in Q4 2024. Similarly, BTL mortgage rates have eased from 5.59% to 4.28% over the same period.

Jonathan Samuels (main picture), CEO of Octane Capital, 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-let mortgages.

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