PROPERTY investors set to repay a short-term bridging loan by refinancing onto buy-to-let mortgages could face lower loan offers, additional equity requirements or costly extensions as mortgage rates rise due to inflation concerns, experts have warned.
Specialists property finance brokers say that even a relatively small change in the ‘stress rate’ used by lenders to test rental affordability amid market volatility can make a significant difference — and put borrowers in a precarious position.
A illustrative example provided to Bridging Loan Directory by Nouran Moustafa, practice principal and independent financial adviser at Roxton Wealth, highlighted the real financial impact of rising mortgage rates for property investors.
Moustafa said that, on a property generating £24,000 a year in rent, a stress rate increasing from 5.5% to 6% as lenders hedge their positions could reduce the loan supported by that income from approximately £349,000 to £320,000 — a shortfall of around £29,000.
In the real world, the exact shortfall would naturally depend on the lender’s criteria, the borrower, the property, rental income and associated product costs.
But lenders and specialist brokers told Bridging Loan Directory that the reality of refinancing does not always match the theory, or assumptions made, when a bridging loan is taken out, especially with house prices under pressure at the same time as mortgage rates rise.
Bridging finance is short-term borrowing used when a property transaction needs to complete quickly or before longer-term funding is available.
Investors often repay it by moving onto a buy-to-let mortgage once work has been completed, a property is tenanted or the required longer-term finance can be arranged.
But if mortgage pricing increases or lending criteria change before that refinance takes place, the amount available can fall even when the property’s rent and value have not changed.
Duncan Kreeger, founder and CEO of commercial mortgage lender and bridging specialist TAB, said refinance exits are likely to receive closer scrutiny in the current climate.
Kreeger said higher ‘term’ rates on a buy-to-let mortgage do not automatically prevent an exit, but affordability, rental cover, property value and any contribution from the borrower all needed to remain credible.
TAB says it has restructured cases where a refinance no longer supported the original exit assumptions, and many other lenders will likely be doing the same.
Options for investors planning to exit a bridge if rates move against them include reducing the outstanding bridging balance, introducing additional equity or extending the loan term.
Isaac Ross, founder of Liqwid, another specialist property finance lender, said: “We are seeing a noticeable trend where recent term-mortgage pricing shifts and tighter down valuations mean refinances are not always entirely covering bridge redemptions, leaving some landlords taking out less equity than they originally anticipated.
“In response to this tighter environment, the wider market has been forced to adapt its affordability and rental-coverage calculations. Higher rates mean lenders can no longer rely on legacy assumptions, making rigorous stress testing essential across the board.
“Lenders and underwriters are strictly testing rental income coverage against current market realities to ensure exit strategies remain robust before any capital is deployed.”
Moustafa said highly leveraged investors and lower-yielding properties were particularly exposed.
Houses in multiple occupation and converted properties may face additional uncertainty where planning, licensing, rental evidence or valuation methodology remains unresolved.
“Extending the bridge may buy time, but additional interest and fees can turn delay into damage,” she said.
Seeking a different buy-to-let product may offer another route, but a lower headline rate does not necessarily provide a complete solution.
Adam Stiles, managing director at Helix Financial Partners, said some mortgage products combined lower rates with higher arrangement fees.
“While the lower rate might improve the rental-affordability calculation, adding a substantial fee to the loan could leave the borrower in a more difficult position relative to the property’s value.
“Bridging always requires a Plan A, B and C when it comes to exits,” he said.
Tony Sanchez, founder of Bridging Loan Directory, said: “Our recent reporting suggests that rising mortgage rates are not only increasing monthly payments but reducing the amount a landlord is able to borrow when refinancing out of a bridging loan.
“Where the original exit relied on maximum leverage, even a relatively small change can leave a material shortfall. That may require additional equity, a smaller refinance or an extension of the bridge, bringing further interest and fees.
“It underlines why refinancing assumptions need to be reviewed throughout the loan rather than shortly before repayment is due.”
Borrowers with limited cash reserves, tight rental coverage or high borrowing relative to the property’s value are likely to have the least room to absorb market conditions moving against them, as they now are.
Properties whose exit depends on an increase in value or specialist lending criteria may face similar pressure.
Kreeger recommended reviewing the proposed refinance at least three months before the planned exit, and earlier where the transaction was highly leveraged or depended on the property increasing in value.
