Loans that allow developers to repair run-down properties and make them available for rent are proving popular.
By now we are all well-versed in the narrative that landlords and property professionals are finding it harder to achieve the same return on investment from their buy-to-let portfolios than they used to.
The affordability stress tests, the MEES energy efficiency regulations and the changes to tax relief for mortgage interest payments have certainly made it harder. However, some landlords are looking for other ways to achieve their returns. Step forward, bridge-to-let.
We are seeing a steady increase in (and demand for) these products. Landlords and developers are seeking distressed and derelict properties that are in need of repair and – using bridge-to-let – bringing them up to standard and adding them to their rental portfolio.
So that we are all on the same page, it is worth defining exactly what a bridge-to-let is. As you know, bridging finance is always short-term, and needs a clear, defined, practical and achievable ‘exit strategy’. Nine times out of 10, that will be selling the property or refinancing on to a mortgage.
A bridge-to-let product is a bridging loan with the exit plan built in – easily switching to a pre-approved BTL mortgage at the end of the bridging term.
Good business sense
The increase in demand we are seeing for these types of products is driven by the market factors mentioned above, but also because – for many landlords and property professionals – they make good business sense. Here are five reasons why:
First, bridging loans are a fast, flexible source of finance that is often underwritten on a case-by-case basis. This bespoke approach leads to quick lending decisions being made, making it ideal for auction finance or when there is a tight deadline, for example.
‘Unmortgageable’ properties that the high street is unlikely to lend against – with no kitchen or bathroom –for example, are no problem for bridging lenders.
Whether it’s a listed building, land without planning permission, a property with Japanese knotweed or a complicated legal undertaking such as splitting titles – bridging loans let you take advantage of opportunities the high street cannot.
Second, having pre-approval for a BTL mortgage takes the pressure off the borrower to arrange additional finance to redeem the bridge. Going into the project with the security of a longer-term plan suits both borrower and lender.
Third, in most scenarios your borrower will have a property to purchase and some renovation costs. If the property is £80,000 and build costs £20,000, landlords can borrow up to 80 per cent of the total £100,000 purchase and build cost – not just against the property itself. This will, of course, depend on the gross development value being greater than these costs.
Fourth, the usual fees your client would have to pay the lender to set up their refinance from the bridge on to a new mortgage (if refinance is their exit) can be avoided. Many bridge-to-let products will not charge the borrower to switch from their bridge to their term bridge-to-let loan.
Finally, lenders will not re-mortgage a property within six months of purchase or allow the purchase of a property that the vendor has owned for less than six months.
But two of the key benefits of bridging finance is that there are no early redemption charges, and the borrower only ‘pays for what they need’ – meaning if they finish renovations early, they can redeem the loan penalty free. A bridge-to-let will not hold a borrower to those usual restrictions. If they finish the work in three months, for example, they can switch to the term product immediately.
Bridge-to-let loans are not for everyone and will not always have the most competitive price. But for the speed, flexibility, reduced fees, efficiency – and for the peace of mind having the exit agreed upfront can give borrower and lender – they will certainly be a good choice for many.
Lucy Barrett is managing director at Vantage Finance