Bridging finance is a versatile and useful tool used by many property investors but is often overlooked by buy to let landlords. Consultant Paul Keddy explains what it is and how you can use it to expand and improve your property portfolio.
When you think of bridging finance, you may consider it more of a tool for property developers, rather than buy to let landlords. However, this versatile finance is a brilliant tool to have available for every landlord, no matter the size of your property portfolio.
What is Bridging Finance?
Bridging finance is a form of short-term loan that is often used when funds are required quickly, as you can access funds much faster than traditional mortgage finance. It has a variety of uses, but commonly investors use it to finish developments, bridge a shortfall of funding between buying and selling where a sale is delayed, purchase at auction and refurbishment; it’s an incredibly useful type of finance!
As the name suggests, a bridging loan used to ‘bridge the gap’ from the point of purchase to the loan’s exit. Typically, an exit requires the loan to be refinanced or the property sold to repay the loan. Bridging lenders will always require your exit strategy to be in place before releasing funds, to ensure that you have the means to repay the loan.
The main benefit of bridging finance is the speed at which you can receive it, generally three to four weeks from application. This quality gives borrowers more flexibility to carry out their investment plans, rather than needing to wait to remortgage and raise capital, for example. It’s for this reason that it’s actually an incredibly handy tool to have as a buy to let landlord!
When Would Buy to Let Landlords Use Bridging Finance?
The two most common uses that buy to let landlords have for bridging finance are:
- Purchasing property at auction
- Refurbishing buy to let property
Purchasing Property at Auction
Property auctions can be a great way to quickly purchase below open market value property and expand your buy to let portfolio. The reason property investors often use bridging finance is that auction houses usually have a four to six-week completion deadline, meaning that securing a formal buy to let mortgage is unlikely to work with this timeline. As bridging finance can be arranged and drawn down within three to four weeks, it’s a much more reliable way to secure property bought at auction.
As I mentioned above, bridging is short-term finance, and lenders will always require an “exit” strategy at the point of application. When purchasing auction property, there are three standard ‘exit’ options:
- Let the property – you can refinance the property onto a buy to let mortgage
- Refurbish the property and sell it
- Refurbish the property and retain as a buy to let
If you intend to let the property out, you’ll need a Decision in Principle (DIP/AIP) for a buy to let mortgage when you apply for the bridging finance; this is something our brokers will be able to help you with. You can read more about purchasing property at auction, here.
Refurbishing Buy to Let Property
Bridging finance for refurbishment falls into two categories: light and heavy. Light refurbishment generally covers anything that isn’t a structural change and doesn’t require planning permission: updating general wear-and-tear, replacing kitchens and bathrooms, or installing measures to increase EPC ratings. Making improvements to your buy to let properties not only opens up the potential to charge higher monthly rents, but it can also increase the value of the property!
Sometimes, if a property isn’t of a rentable standard and requires work to attain a buy to let mortgage (more common when purchasing auction properties), bridging finance can be used to secure the purchase, complete the required improvements before refinancing onto a buy to let mortgage. In all these circumstances, rather than using your savings or a director’s loan, it may be possible to take out bridging finance for a short period and refinance the property at the end to repay the loan.
For the more experienced landlord or developer, you might be wanting to extend a residential property, convert an old commercial property into residential dwellings, or an existing residential property into an HMO or Multi-Unit Freehold Block; this would be considered heavy refurbishment. For more information about requirements for these types of projects, you can read a previous blog which covers this topic in more detail.
How does bridging finance work?
As I’ve said above, bridging finance is a short-term loan, and therefore interest is usually charged monthly for around three to 18 months. Generally, repayments are not made during the term of the loan, as for situations where the property is being refurbished and therefore not let out, lenders don’t want to cause unnecessary financial stress on the borrower. Some lenders will consider allowing you to make repayments during the loan term, but only if you’re very experienced with this type of finance or of high net worth. As with most specialist forms of property finance, lenders will assess each case individually, and your broker will be able to help put a case across if they think a lender will consider it.
At the moment, bridging rates start from around 0.55% per month for a nine-month term, with a gross maximum loan to value (LTV) of 75%*. Bridging lenders deduct the product arrangement fee, and the total predicted interest to be charged across the term from the outset, meaning that you a 75% LTV ends up being about 70%. A broker will be able to help you make all the calculations based on your circumstances before you make any applications.
If you think bridging finance may be useful in your buy to let investment journey, please do not hesitate to contact me, Paul Keddy on 01732 471655 or email firstname.lastname@example.org.
*Starting rates correct as at 14/10/2020