The UK’s finally into the realms of single digit interest rates – not having been here since the great recession of 2008.
With unprecedented headwinds running into the last quarter of 2022 – a deep recession almost inevitable – what are the chances that the Bank of England (BoE) will have few choices but to increase bank interest rates further, and how will that affect the commercial sector?
Stephen Clark from Finbri, a commercial bridging finance broker, says, “It feels very much like two sides of the same coin. The UK has had an extraordinary amount of stimulus via quantitative easing over the past 14 years. It’s added somewhere in the region of £895bn according to the BoE. The 2008 recession was just the start. Brexit and the pandemic have all added to a huge sum of liquidity that’s floating around in the UK. With historic low interest rates during the same period businesses have got used to cheap credit. That’s all likely to change as the BoE attempts to rein in the current historic rise in inflation.”
The Monetary Policy Committee voted to raise the Bank of England base rate from 0.75% to 1% in May 2022. This is the first time in over 18 years that the number has risen to a single digit.
The Bank of England uses the base rate to charge other banks and lenders when they borrow money, so a hike is likely to affect how much borrowers pay.
In short – probably not. Not all lenders borrow directly from the big banks such as Barclays or RBS. Whilst there are larger lenders who typically provide funds for commercial bridging finance, there are many who are funded by other sources, such as private investors and family offices. These lenders have the choice to raise their interest rates in line with the BoE or not and this is where alternative finance starts becoming competitive.
Stephen from Finbri goes on to say, “An interest rate rise has been a long time coming but if you take the average interest rates since the 1970’s, it’s somewhere around the 7% mark, there’s still a lot of movement to be had. Whether or not it reaches the heights we saw pre-2008 remains to be seen but in my opinion commercial borrowers should be mindful that 1% is probably not where we’ll stay for long.”
Depending on what type of loan a business has taken, and its terms, those who already have a bridging facility are unlikely to be affected directly for an existing loan as it is sold at a fixed rate for a fixed period of time and therefore won’t be affected by a base rate rise.
Private investors or family offices are less likely to increase their interest rate because of a base rate rise from the BoE as their flow of funds is not directly linked to the base rate. These funders are also aware that they will have a new competitive advantage over the larger bridging loan lenders who rely on funds from banks. That being said, it would be in the interest of private investors or family offices to increase their rate of interest as the cost of borrower increases – even if their rise doesn’t match the bigger lenders rate and sits just below it.
Commercial bridging finance, also called commercial bridge loans, are short-term finance facilities for commercial businesses. They’re most commonly used to purchase commercial or residential property for investment purposes, however, commercial bridging loans can be used in a wide array of scenarios. Examples include:
- Raising cash for almost any business related activity, including:
- Working capital
- Investment in machinery, plant or technology
- Purchasing stock
- Paying wages, either as employees or sub contracting
- Paying HMRC tax bills, including:
- Corporation Tax
- NI Contributions
- Stamp duty
- Purchasing investment property
- Renovating or refurbishing investment property
- Purchasing land
- Developing land
Commercial bridging (sometimes called commercial mortgage bridge loans) are short-term commercial secured loans used when permanent financing is not an option.
Commercial: means involving or relating to the buying and selling of goods.
Bridge: Something that bridges the gap between two very different things or states.
The reason why commercial bridges typically involve property purchasing, renovation, refurbishment or development is simply that traditional lenders tend not to occupy this finance lending space as the loans are considered higher risk.
Commercial bridging is typically used for lending on commercial property ventures for an array of property types such as:
- Buy to let investments (both residential and commercial)
- Retail units
- Pubs & restaurants
- Hotels, guest houses & B&B’s
- Industrial premises
- Warehousing & distribution centres
- Land for development & brownfield land
- Leisure centres & gyms
- Care homes and hospices
- Nurseries, free schools & colleges
- Holiday parks, golf courses & yacht clubs
- Car parks
- It can also be used in some instances by people who want to buy or refinance a larger house.
Yes, currently, all commercial bridging finance is unregulated, which means the FCA provides no protection or oversight to this sector. Your loan won’t be regulated if you’re getting a loan for an investment property, a business building, or a buy-to-let.
They are often used for the financing of commercial ventures, often in situations when commercial mortgages are inappropriate. It’s usually because of how fast money is required and also because a commercial loan would be impossible for high street lenders to underwrite, for example, due to the state of the property or the circumstances of the borrower.
There are many lenders, both big and small in the UK who facilitate commercial bridging finance. There are two typical methods of sourcing funds, either going direct to a lender or through a broker. There are advantages and disadvantages to both, however the real trade off is usually two points:
- If you know a lender who is willing to lend to you in your unique circumstances, going direct means you’ll save on the broker fees.
- If you don’t know which lender is most suitable for your situation, using a broker will help you source one or two lenders who want your deal and they’ll help drive down the cost of borrowing by creating a competitive market for your deal.
As Stephen from Finbri explains, “It’s the job of a good broker to know which lenders want which types of deal. If you don’t know that information then it’s unlikely that the borrower will be able to get the best rate because we’re often sourcing funds from both private investors and family offices – not always the big players. The reason for this is that these lenders are less risk averse and can have keener rates for the more niche circumstances.”