Over the past decade, buy to let investment has gone from strength to strength. Purchasing property for private letting is now one of the most popular ways to invest savings, and with interest rates at an all-time low, buy to let properties often generate much better returns than a savings account (and are a lot more reliable than stocks and shares). With the ongoing popularity of these properties there are many developers and landlords looking to expand their portfolio, and doing so with the help of financial tools such as bridging loans. Although many bridging lenders are not regulated by the Financial Conduct Authority (FCA) and so are unable to lend against owner-occupied property, they are still able to provide loans for buy to let properties.
In this article we’ll discuss what makes a bridging loan so appropriate for buy to let investors and how it can be put to use securing valuable real estate. As with any financial product bridging loans will have a cost attached, and as a secured loan borrowers stand to lose their collateral if they fail to repay. Because of this it’s vital to seek expert advice before pursuing bridging finance, and anyone considering this form of finance should consult a financial advisor before proceeding.
Bridging finance is an almost uniquely useful tool for purchasing buy to let property, but how exactly does it work? A bridging loan can be said to fill the niche between mortgages and personal loans; it’s secured against an asset, just like a mortgage, but bridging loans are not regulated in the way that mortgages are. This means that bridging lenders can be much more flexible with their terms, and are able to offer loans in a wide range of formats, similar in some ways to a personal loan. Generally speaking, a bridging loan will be of a relatively high value and short duration, ranging from between £10k to £10M and with terms of up to 18 months. Of course, this is just a rule of thumb, and many lenders offer products outside of these limits.
Bridging loans are so called because they enable borrowers to “bridge the gap” while they put long-term financial solutions into place. A bridging loan is often more expensive than, say, a mortgage, but it is much faster to arrange, and infinitely more flexible. While a mortgage may easily take months to put in place, the funds from a bridging loan can often be made available just 7 days after an application is first submitted. Being able to move this quickly lets borrowers take advantage of opportunities at short notice, and to secure property without waiting for the bank’s approval.
Bridging loans are an excellent tool for buy to let purchases because they are so flexible. They are designed to be used by property developers and landlords, and the lenders which offer these forms of finance are highly experienced and able to offer useful insight and advice, which lets them judge each borrower’s situation individually. Even if a borrower has a poor credit history, they may still be able to secure a bridging loan if the lender believes their property is worth investing in. Bridging lenders are also able to lend against properties that are unmortgageable; for instance, if a property is uninhabitable or has a short lease remaining, a mortgage provider simply won’t touch it, while a bridging lender will still be able to provide funding.
This makes bridging finance a powerful tool; if a property needs to be secured without the use of either a mortgage or the investor’s own capital, a bridging loan may be used. This allows investors to act quickly and decisively, without worrying about whether they’ll be able to secure the necessary funding.
Let’s examine a typical buy to let purchase using a bridging loan to highlight how it can be used to enable expansion. The borrower in this case is a professional landlord who already holds a small portfolio of properties, and wishes to expand by purchasing a house that has recently come to market. With mortgages in place on all of their other properties, this landlord does not have a great deal of spare capital on hand, and will need to borrow in order to meet the costs of this new purchase.
However, this new property is in need of refurbishment before it can be mortgaged, so a bridging loan must be arranged in order to complete the purchase; after consulting their lender, the landlord is able to arrange a valuation on the property and is approved for a loan that covers both the cost of the property and the cost of refurbishing it into mortgageable condition. With funds available for draw-down almost immediately, the landlord can submit their bid for the property as a cash buyer, giving them the edge over other bidders as they’re able to complete quickly.
They are successful in their bid and complete the purchase with the funds from their bridging loan. Once refurbishment is complete, the landlord is able to arrange for a mortgage to cover the cost of the property; this money repays the bridging loan in full (plus interest), and the landlord is able to move on to secure new properties.
As mentioned previously bridging loans are a form of secured finance, which enables the lender to repossess the property if the borrower fails to fully repay the loan. This means that borrowers must be certain that their investment will bear fruit, and that they’ll be able to meet the costs of repaying the loan and all the interest. Before approving a loan, bridging lenders will require borrowers to submit an “exit strategy” detailing how they intend to finally repay the money they’ve borrowed. In many cases, as in our example above, the exit strategy is to secure a mortgage for repayment of the bridging loan, and as long as there is a viable plan in place most bridging lenders will be satisfied with their client’s application.
Ian Boden, sales director at LendInvest, says the business's priority is to ensure the right technology is in place to make brokers’ lives easier. He was speaking after the specialist property finance lender launched a new buy-to-let (BTL)…
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