In June, five of the eight members of the MPC voted to maintain the base rate.

How could bridging finance be impacted if there is a rate rise?

"Even a small rate rise would be passed on through the funding lines to the bridging lenders, this alone would likely signal the end of the intense competition on interest rates in the bridging market witnessed in the last 12-18 months,” said Matthew Tooth, COO at LendInvest.

Richard Deacon, sales director at Masthaven, felt that any change in the base rate would undoubtedly have an impact on bridging rates within the industry.

"This is because all bridging finance companies are funded slightly differently. 

"In my experience, all types of investors tend to want to see more return on their investment. 

"Rates going up would bring other investment opportunities, and they would want a better return on their money, but this can only be achieved by interest rates or returns from the bridging lender going up.”

Paul Riddell of Lendy added: “It’s likely that when the Bank of England increases its base rate, bridging lenders, who are fuelled by the banks, will ultimately be forced to increase the interest rates they charge.”

Jonathan Sealey, CEO of Hope Capital, added: “…Let’s not forget that while residential mortgages are dictated by base rate, other areas of the lending market, including bridging finance, will not be affected as bridging rates are set independently.

“On the one hand, it is evident that increasing competition is having an impact on the bridging market and rates are being driven down as a result.

“However, in terms of lenders’ funding lines and whether they will be impacted, the most important factor to consider is how a bridging lender is funded and where the funds are coming from.

“In some cases, funds may be unavailable for those who have to go to an external credit committee to approve a loan.

“However, when the base rate does increase, it will be minimal.

“In other words, offerings are currently at record lows so a small increase should be tolerable.”

Jonathan pointed out that lenders who had their own funds to lend could still evaluate each case on its merit.

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“They do not require any outside investor influence, so will not be impacted by the rise in base rate.”

Speaking from a peer-to-peer perspective, Paul added: “P2P lenders who have relatively low costs of funding should be able to keep the impact of a rate rise under control.

“This is why P2P lending can offer a valuable alternative to the banks.”

Are there other external factors which could impact bridging lenders?

Michael Dean, principal at Avamore Capital, agreed that an increase in the base rate would inevitably feed through to the cost of funding for most bridging and development lenders.

But added that the cost of funds could increase without UK interest rates rising.

“Capital markets are increasingly international and US Treasuries are generally considered to define what capital markets professionals call the ‘risk-free rate’ as they are essentially the least risky (at least in terms of perception) investment globally.

“This is because nobody expects the US government to default on its debt.

“Investment returns on all other asset classes are judged on the premium paid over the ‘risk-free rate’, with the bigger the premium, the higher the perceived risk (which is why riskier assets are expected to deliver much higher returns than safer ones to compensate for the increased risk).”

Michael claimed that US interest rates were anticipated to rise by around 50bps more this year as the US economy was growing strongly and the US Treasury yields would also rise to reflect that.

“Assuming the risk premium on other asset classes remains the same, that should drive up the required rates of return for investors against these asset classes, regardless of jurisdiction.

“This means that rates of return required by those that fund bridging lenders are quite likely to increase.”

Michael believed that bridging lenders would have to make difficult decisions, including:

• Do they pass on the increase in costs to consumers in possibly the most competitive market (in terms of pricing) ever witnessed?
• Do they reduce their operating margins and hope for “survival of the fittest” and not pass on the cost to consumers?
• Do they go up the risk curve to compensate their increased costs by taking more risk in terms of development and/or LTV?

“In the medium term, we should expect to see rate rises in the UK as imported inflation (a consequence of Brexit) will start to really sink in as sterling weakens further against the euro and the dollar (especially as the US continues to raise rates),” added Michael.

“The main way for the Bank of England to combat this inflation is to protect the pound by increasing interest rates.”