September 12, 2019
When buy-to-let opportunities arise, investors frequently need access to a fast, reliable source of finance to secure the purchase. What’s more, to qualify for mortgage lending, and to help attract their first tenants, new buyers may also need funds for essential property improvements.
If you’re new to buy-to-let investing, securing funding isn’t always plain sailing. After all, you don’t yet have a rental income to draw on, and if you are yet to establish your credentials as a property professional, traditional high street lenders can be reluctant to approve loan requests. A bridging loan might be the solution you need. Flexible and quick to arrange, they are especially useful for first time investors. To help, we’ll give you a closer look at how bridging loans work — and at how they can help you get your buy-to-let journey up and running.
As their name suggests, bridging loans were originally introduced as a way to help property buyers ‘bridge’ a funding gap. When you are selling one property and buying another, it’s not always possible to get the timings exactly right. There may be a brief delay where you need to finalise your purchase but the funds are still to come through on the sale — a ‘broken chain’ scenario. It’s in these situations where short-term loans become an option — specifically, where bridging loans can come in handy: a short-term loan to fund your purchase, using the property as security. As soon as the linked sale has completed, you’ll repay the loan.
But this type of finance isn’t just for managing a sale and purchase transition. It can also be used to finance a range of requirements linked to the purchase and renovation of properties, which is why they are particularly useful for first time investors.
As a prospective landlord, you are almost certainly looking for two things from your new investment: a strong rental yield, coupled with the promise of capital appreciation. Put simply, you’ll want the property to generate a healthy income through rent, and when it comes to selling, ideally it will have increased in value. A semi-detached house that’s ripe for conversion, a flat in an up-and-coming area, an inherited property whose new owners are anxious for a quick sale: in all cases a bridging loan might offer the potential to add value and generate a strong rental income stream.
Unless you are fortunate enough to be a cash buyer, your long-term plan will involve financing the investment through a buy-to-let mortgage. But as many first-time investors quickly discover, to seize the best opportunities, it’s often necessary to act quickly — sometimes quicker than the time it takes to put your mortgage into place.
For a new landlord, the auction room can be the perfect arena for picking up a viable rental property at an attractive price. But just be aware that once the gavel goes down on your successful bid, a 10% deposit is usually due on the day of the auction, with the balance payable around a month later. If you’re unable to get the deposit funds together in time for the auction or if it looks unlikely that your buy-to-let mortgage will be in place for the completion date, a bridging loan can provide the stop-gap you need.
A ‘distressed’ sale refers to a situation where the seller is keen to offload the property as quickly as possible – another prime opportunity for seizing a bargain. Let’s say for instance that the estate agent informs you that the buyer is willing to accept a significant discount on the list price, but only if you can complete within the month. Once again, a bridging loan can come to your aid if the timetable is too tight for finalising mortgage arrangements.
You spot a flat with strong rentable potential offered for sale at an unusually low price. Like most flats, the title is offered on a long leasehold basis. The reason for the price discount is linked to the fact that the leasehold expiry date is fast approaching. Even when considering the likely costs of extending the lease, this is still a strong investment opportunity. The problem is that the lease term is too short for a traditional lender to approve a mortgage on it. In circumstances like this, it may be possible to use a bridging loan to cover both the purchase price and the cost of lease extension.
For many buy-to-let investors, the overall aim is to buy and then refurbish the property to a standard that maximises its rental potential and value. A bridging loan can be the perfect solution for supplying the capital to fund the works. If the property is uninhabitable at the point of purchase (with no functioning bathroom or kitchen, for instance), traditional lenders will be unlikely to offer a mortgage. Here, bridging finance can be used to fund the purchase and the cost of remedial works with a view to switching over to a mortgage once the property meets the lender’s required specification.
In all of these scenarios, there is a definite exit strategy. In other words, the investor has a clear plan for paying off the bridging loan – usually through switching to a buy-to-let mortgage. Remember that this type of lending is only suitable for those situations where you need access to funds for a relatively short period (usually no more than a year), and it’s clear how you are going to repay them. In the instance of a more ambitious buy-to-let plan, say, a complete refurbishment of a property into self-contained flats, don’t overlook the possibility of specialist development finance to get your project off the ground.
To get the best possible terms and a flexible arrangement tailored just for you, it helps if you have access to a bridging finance specialist. If you’re interested in learning more about how to make the most out of your property opportunities, browse our guide to property finance below or speak to West One today.