Bridging finance is a versatile tool many property investors use, but buy to let landlords often overlook it. Our latest blog examines what bridging finance actually is, and how you can use it to improve your property portfolio.
A common misconception is that bridging finance is a complex tool for experienced property developers, but is unsuitable for buy to let landlords. However, this versatile finance can be a brilliant option for every landlord given the right circumstance, regardless of your property portfolio size.
What is a Bridging Loan?
A bridging loan, or bridging finance, is a short-term property loan typically used when clients require funding quickly, as you can access the cash much faster than with a standard mortgage application.
Bridging loans are most commonly used:
- To finance property developments
- To bridge a shortfall of funding between buying and selling where a sale is delayed
- To purchase a property at auction
- To complete a property refurbishment
As the name suggests, a bridging loan can ‘bridge the gap’ from the point of purchase to the loan’s exit. Typically, the exit from the bridging finance will be when you refinance the property onto a buy to let mortgage or sell it to repay the loan. It’s important to note that 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.
How long does it take to source bridging finance?
One of the main benefits of bridging finance is how quickly you can access the funds. Generally, clients will receive funding three to four weeks after their initial application. This allows borrowers more flexibility to carry out their works, rather than, for example, needing to wait to remortgage to capital raise. As such, many buy to let investors could significantly benefit from using a bridging loan for their next property investment plans.
How do bridging loans work?
As bridging loans are a type of short-term finance, lenders charge interest monthly, from three to eighteen months, or the required loan term. Lenders know that during this period, property investors will probably not earn anything from the property. As such, the capital and interest repayments are not made during the term of the loan, but repaid as part of the exit at the end of the rate period. Some lenders may consider allowing you to make repayments during the loan term if you can evidence your experience with this type of finance. To see what options are available to you, speak to an experienced mortgage broker who is comfortable dealing with these types of complex cases.
How much does bridging finance cost?
Currently, bridging rates start from 0.79% per month for a 12-month term*.
Bridging lenders deduct the product arrangement fee and the total predicted interest to be charged across the term from the outset, meaning that a 75% LTV deal ends up being about 70%. A broker can help you find the right deal for you based on your circumstances before you make any applications.
Why use bridging finance?
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. As auction houses typically have a four to six-week completion deadline, securing a buy to let mortgage is unlikely to work, which makes bridging finance perfect for these types of cases. 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 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:
- Refinance the property onto a buy to let mortgage
- Refurbish the property and sell it on
- 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 expert brokers will be able to help you with.
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, such as 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!
If a property isn’t in a lettable condition (which can be common when purchasing at auction), you can use bridging finance to secure the purchase and complete the required improvements, before refinancing onto a buy to let mortgage. In these circumstances, rather than using your savings or a director’s loan, it may be possible to source bridging finance to cover the refurbishment period and refinance the property at the end to repay the funds. You can read more about how our client used a bridging loan for property refurbishment here.
For the more experienced landlord or developer, you might want to extend a residential property, convert an old commercial property into residential dwellings, or turn an existing residential property into an HMO. These would all be considered heavy refurbishment. For more information about requirements for these types of projects, speak to our expert commercial team to discuss your options.
*Rates correct at time of publication, July 2023
Looking for short-term property finance?
If you’re considering bridging finance for your buy to let portfolio, please get in touch. Our expert brokers will be able to discuss your requirements and advise you on the best plan of action for your property investment journey. To get started, call us on 0345 345 6788 or submit an enquiry here.
