Refurbishments and energy efficiency upgrades aimed at improving rental property EPC ratings are expected to fuel the demand for bridging loans this year.
This projection comes from Octane Capital, a specialist lender that analysed figures from the EY Bridging Report. Their review highlights how borrowers have been using bridging loans since 2021.
The findings indicate that refurbishment was the leading reason for borrowers seeking bridging finance last year. According to the data, 33% of respondents cited refurbishment as their primary motivation for obtaining a bridging loan. Other notable reasons included purchasing properties at auction (19%) and dealing with mortgage delays (16%).
Refurbishment remains the most common reason for borrowers to utilise bridging loans, though its popularity has steadily declined over the past few years. Back in 2021, half of all bridging loan borrowers cited refurbishment as their primary reason for borrowing. This percentage fell to 35% in 2022 and has recently declined further to 33%. Despite this downward trend, Octane Capital, a specialist lender, predicts that refurbishment-related bridging loan usage will rise again by 2025.
One of the key factors behind this potential reversal is the expectation that the mortgage market will improve in terms of affordability. As the financial landscape evolves, borrowers may find bridging loans a more appealing option to fund refurbishments and energy efficiency projects. These types of improvements, particularly for rental properties, are expected to remain in high demand due to tighter EPC (Energy Performance Certificate) regulations.
Bridging finance is likely to gain more traction among landlords and property investors as borrowing costs are projected to decrease. Octane Capital anticipates that 2025 will bring more favourable borrowing conditions, driven by expected changes in the broader economic environment. This would make short-term finance a more viable option for property owners looking to enhance the value of their investments.
One recent development supporting this outlook is the Bank of England’s decision to cut its base rate. In February, the base rate was reduced from 4.75% to 4.5%, providing some relief to borrowers. Interestingly, two members of the Bank’s Monetary Policy Committee had advocated for an even larger rate cut of 0.50%. This highlights the possibility of further reductions in the near future, which could significantly impact the cost of borrowing.
Lower interest rates often lead to more affordable finance options, and bridging loans are no exception. As rates continue to decline, the overall cost of securing short-term finance could become less burdensome for landlords and developers. This shift could reinvigorate the demand for bridging loans, especially among those aiming to complete property refurbishments or improve energy efficiency ratings to meet stricter EPC requirements.
Currently, Octane Capital’s analysis provides a snapshot of the cost of borrowing for refurbishment projects. For instance, a £200,000 refurbishment loan typically incurs a total cost of £26,000. This figure includes both the interest charges and various associated fees. While this may seem significant, reductions in the base rate could help lower these costs further.
Additionally, with rising awareness of the need to improve the energy efficiency of properties, many landlords are prioritising refurbishments. These projects not only help meet EPC regulations but also enhance the appeal and value of rental properties. This dual benefit makes bridging loans an increasingly popular choice for landlords needing quick access to funds for such works.
In summary, while refurbishment-related bridging loan usage has seen a decline over recent years, the outlook for 2025 appears more optimistic. With the possibility of more affordable borrowing options and growing demand for energy-efficient property improvements, bridging finance is poised to play a crucial role in the property market. As economic conditions evolve, landlords and investors may find bridging loans an invaluable tool to achieve their refurbishment goals.
In March, the Bank of England opted to keep the base rate steady at 4.5%. Despite this decision, there is a widespread expectation that interest rates will gradually decrease over time. If this happens, the cost of securing bridging loans is also likely to reduce, making them a more attractive option for borrowers.
Landlords, in particular, have strong motivation to enhance the energy efficiency of their properties in the coming years. Labour has proposed that by 2030, all privately rented homes must achieve an Energy Performance Certificate (EPC) rating of at least C to remain legally lettable. This looming deadline could prompt many property owners to undertake refurbishments aimed at improving their EPC scores.
The urgency around improving energy efficiency has grown significantly in recent years, especially due to rising energy costs. Since Russia’s invasion of Ukraine in early 2022, the UK has experienced a sharp increase in energy prices, putting pressure on households and landlords alike to cut consumption and lower monthly bills. Upgrading the energy performance of properties can play a crucial role in achieving these savings.
Jonathan Samuels, chief executive of Octane Capital, emphasised the benefits of bridging finance in helping landlords meet these goals. He pointed out that bridging loans are known for their flexibility, which has contributed to their popularity for funding property refurbishments.
Although the use of bridging loans for refurbishments has decreased slightly in recent years, Samuels believes that demand could surge in the months ahead. As borrowing costs drop and landlords place greater focus on meeting EPC requirements, bridging finance may once again become a key tool for property investors.
The proposed 2030 deadline is not the only reason landlords are prioritising energy efficiency. Reducing energy consumption can also lower monthly utility bills at a time when many households are struggling with high costs. For landlords, improving EPC ratings not only ensures compliance with future regulations but also enhances the overall appeal and value of their rental properties.
Samuels highlighted the importance of acting sooner rather than later, noting that as energy prices remain elevated, the benefits of improved energy efficiency are more apparent than ever. Bridging loans, he added, could be instrumental in helping landlords achieve these improvements quickly.
In conclusion, while bridging loans have already been a popular source of finance for refurbishments, their importance may grow in the years to come. With EPC regulations tightening and energy costs still high, landlords are likely to turn to flexible finance options to future-proof their properties and reduce ongoing expenses.
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