Do fixed rates now offer less certainty?

One of the things I love the most about the bridging market is how quickly it adapts to change.

Market uncertainty in 2022 saw the emergence of variable bridging rate products. And, as we enter another period of turbulence, their prominence in the market couldn’t be clearer.

The position today is not dissimilar to the one we saw in the Summer of last year. Swap rates have jumped following the recent release of inflation figures. The market has seemingly been spooked by the fact that there was an expectation inflation would fall to lower level than the 8.7% recorded. It seems very likely that high inflation levels will lead to the Bank of England increasing the base rate again tomorrow.

Volatility like this causes most non-bank lenders with a pricing headache – but particularly so if they offer fixed rates. With swap rate increases eroding margins, existing loans within a lender’s pipeline could quickly become unprofitable within a matter of days. This leaves the lender with a difficult decision as to whether to take the hit, increase the rate – or, even worse, withdraw the product altogether

We have already seen rate increases and product withdrawals from mainstream Buy-to-Let lenders which will leave hundreds of borrowers in a difficult position.

This is one of the reasons Octane switched to variable bridging rates at the end of 2022. By linking our rates to the Bank of England base rate we are somewhat shielded from market volatility. A variable lender's rate, by its nature, will reprice as the market moves and, because the lender's margin is better protected, it will be less likely to be withdrawn from the market.

Of course, a variable rate cannot provide absolute certainty of how much interest a borrower will pay during the term of a loan as nobody can be absolutely certain of how the base rate will move, but it seems now, perhaps more than ever, certainty of funding is a key consideration for brokers.

With swathes of Buy-to-Let lenders increasing rates or withdrawing products, it’s important the bridging market adapts to help provide a solution. In light of recent market movements, perhaps it will be variable rate lenders best positioned to provide it.