In the influential world of finance, particularly lending, interest rates and broader monetary policy play a crucial role in determining the supply and demand of loans. The recent stabilisation of interest rates in the UK is undeniably a significant factor influencing strategic decisions for those involved in bridging, seeking borrowing, and / or overseeing property portfolios. Like any period of change, the emerging economic landscape presents challenges and opportunities for both lenders and borrowers.
This shift, marked by what seems to be the end of a period of base rate rises, unprecedented since the turn of the century, has seemingly now reached a point of stability. This development appears to be instilling growing levels of confidence in investors, decision-makers, advisers, and entrepreneurs regarding their plans. A welcome change.
Interest rates and uncertainty
Reflecting on the past year should be seen as testament to the resilience and adaptability required in the face of economic uncertainties. Many lenders have successfully navigated a turbulent environment dominated by the unpredictability of interest rate movements, both in scale and frequency. The ability to adapt quickly, pivot, and focus on fundamentals during such times lays the foundation for facing new prevailing headwinds and tackling opportunities.
While a popular misconception suggests that high interest rates are the main influence on a borrower’s decision to proceed, future uncertainty can be a bigger foe, often eroding confidence. Uncertainty surrounding interest rates arguably stemmed from a lack of confidence in when the global economy would stabilise, the direction of government policy, and also when inflation would return to agreed tolerances. This created volatility in money markets and swaps rates, creating a paralysing effect for many and not just in the UK.
For a year, no one had confidence in when the rate rises would stop or at what point. This period of ambiguity inhibited decision-making, with potential borrowers hesitating to commit to loans should rates continue to escalate or without knowledge of how the wider economy might affect their business interests. However, as we move into a phase where interest rates appear to have plateaued, renewed optimism emerges across the entire market and, crucially, the lending ecosystem.
Adopting a longer-term planning horizon
Consider high-value bridging loans, defined as those of seven or more figures, as part of an international property investment. The landscape must always remain shaped by a longer-term view. The perspective of property investors differs significantly from individuals paying their residential property mortgage each month. The resilience of the former group is typically bolstered by the breadth of their assets, their multi-year, strategic perspective, and their ability to adapt or pivot.
Although there is a huge variance of approaches and capability within this group, a long-term planning horizon, mindful of the prevailing economic climate, would typically consider potential upward trends in interest rates, and indeed other macro economic forces. Developers often undertake scenario planning to understand the unique tolerances underpinning their decisions, even though a stable interest rate environment may lead to de-prioritisation of such practices given a low perceived likelihood of imminent change. Whilst the growing range of borrowing options offers many increased choice, with the prospect of these being sustained for longer, countering the ‘short notice’ expiry of offers witnessed in 2023.
Future trends
The fewer number of base rate rises we’ve witnessed in recent months, and indications that inflation is ‘back on the leash’, suggest we could be entering an environment where investment decisions can be taken with more assurance. Especially at the typically more robust, top, prime end of the market. For instance, in London, the National News reports that “…prime London residential properties are predicted to achieve a cumulative growth of 10.8 per cent by 2027, compared with a national forecasted average of 3.8 per cent.”
Further encouragement also came at the start of the year when Fidelity stated in a report on interest rate forecasts in the UK: “According to the Times’ latest annual economists’ survey, the majority of the 41 economists surveyed said that the BoE would ‘reverse its aggressive tightening of monetary policy.’ The most common forecast by the circle of economists was two cuts, while 45% of respondents predicted that the Bank would lower rates three times or more in 2024.”
Bridging loans and property
Analysing the specific impact on international property portfolios and the use of bridging loans also reveals a perspective challenging conventional wisdom regarding the significance of interest rates.
As mentioned earlier, the cost of borrowing is one element of a more complex equation. The decision to proceed hinges on a comparative analysis of potential return against cost. Experienced property investors and developers know that the true measure of an investment’s worth lies not in its nominal cost today but in its potential to yield desirable returns in the future, regardless of the prevailing interest rate or economic climate.
Contemplating the future of high-value lending in a stabilising economic landscape emphasises the need for a blend of insight, adaptability, and long-term planning. Moving forward with lenders who are agile, have proven experience, and a client-focused approach is essential, helping design solutions that best meet borrowers’ specific circumstances.
At Tenn, whatever the prevailing interest rate environment we are experts at developing bespoke bridging solutions. We have unrivalled knowledge of the UK, offshore and international prime and super-prime residential markets, together with the credit, structuring and advisory sectors. This combined expertise enables us to help first-class borrowers unlock capital and pursue opportunities that would otherwise be out of reach.
If you want to talk to us about your plans for the future then please contact us.