Everything you need to know about bridge to let and bridging finance
Despite your dreams of buying a home, funding a business venture or renovating an unloved building, sometimes high street lenders deem a property purchase or mortgage application as just too risky.
That's where a bridging loan comes in. Basically, it’s a short term loan that can be used for most any purpose by businesses and individuals until their next stage of finance comes through or they sell an existing property.
In this article we’ll explain everything you need to know about bridge to let loans and look at:
Bridging finance is always short term, and lenders require the borrower to have an exit strategy in place before they will lend the money. This would take the form of either selling the property or refinancing it onto another mortgage type.
Bridge to let loans are designed for the buy to let market, to allow investors to buy a property they’d otherwise struggle to finance with a traditional mortgage (using bridging finance); but have the added benefit of an exit strategy in-built, by way of a pre-approved refinance onto a traditional buy to let mortgage.
Bridging loans can be used for a number of reasons:
You may be waiting to sell your home; but want to buy another property that has just come onto the market.
You may be looking to buy a property at auction (most have 28 day terms and bridging finance can be arranged in a couple of days or weeks, unlike a traditional mortgage which can take a couple of months.)
Bridging finance can also be used by developers who may want to buy and renovate a property and then selling them on for quick turnaround profit.
To repay tax bills where other lenders won’t allow it
Essentially any time you need short term cash.
What are the benefits of using a bridge to let loan?
Pre-approval of exit finance
Bridging loans can be invaluable in facilitating a property purchase or loan that otherwise would not be possible. Bridge to let can specifically help with those who want/need to prove their exit strategy before they complete. Rather than having to leave this more to chance (in the absence of a full mortgage offer, like some bridging loans where simply an initial agreement in principle would do), or market the property if getting a buy to let mortgage isn’t possible.
Bridging loans can complete quicker
If time is a factor, bridging loans can be underwritten and completed on far quicker than traditional mortgages, we’re talking a few days or weeks as opposed to a couple of months for a standard mortgage.
Can a bridge to let loan be used at auction?
Absolutely. Most auctions require a deposit (usually 10%) after the hammer comes down. You’ll have to sign a Memorandum of Sale and pay the deposit, along with any other fees. The balance of the purchase price will usually be due in 28 days, so a bridging loan is a great way to purchase a buy to let at auction.
Bridge to let mortgages can help break property chain issues
We have spoken to many homeowners who have previously missed out on a property they love because they were waiting for the sale of their current home. A great thing about a bridging loan is that it allows people to complete the purchase of a property before selling their existing home, providing both are considered viable and affordable by the lenders.
A bridging loan closes the financial gap and allows a buyer to purchase a property and then once they have sold their previous property, pay back the loan in full.
As long as the person taking out the loan is in a position where they know that after the loan period, they can pay back the amount in full, a bridging loan can be extremely helpful if they should need a short term financing solution.
Is bridging finance an option for uninhabitable properties?
Absolutely. Using bridging finance to buy an uninhabitable property might be an option as bridging lenders can have a higher appetite for risk and consider the viability of the project as a whole. Bridging finance can be used to bring the building up to standard and then apply for a standard mortgage.
Combining bridging finance with an exit strategy
Bridge to let mortgages essentially work as a bridging loan and the exit in one application. Rather than applying for a bridging loan (with the exit as a remortgage onto buy to let), the applicant applies for the bridging finance and the exit at the same time, so would only complete on the bridging finance if the buy to let remortgage is approved – typically this would only happen with the same lender.
The bridging loan is the first loan that is set up and secured on the property, with funds released on the bridging loan product, to then be repaid by the buy to let at the end of the pre-agreed bridging loan term (or sooner), which then remains on the property as a normal buy to let deal.
It is possible to bridge with one lender and then refinance onto a buy to let with another, but this is generally hard to do in one transaction as the second lender won’t have all the information at the initial stages to process the full remortgage offer, so if using more than one lender the buy to let remortgage tends to get formally approved only once the bridge is live.
Can I use a bridge to let loan to buy and renovate a property?
Yes. Renovating a rundown property is a lot of hard work but can be so rewarding as a project. (Plus the before and after photos will certainly leave you feeling smug!)
Discovering an old building in need of some TLC can be a great investment opportunity, especially if you have the skills and experience to transform it for a future renter or buyer.
With that being said, uninhabitable buildings can often be difficult if not impossible to mortgage with high street banks and lenders, as such buildings are deemed as too high risk.
This is because in the unlikely event that the homeowner cannot afford their mortgage repayments and the property is repossessed, an unfinished house may be harder to resell and so harder for the lender to make their money back.
However, with the simplicity and fast paced nature of a bridge to let loan, so many landlords turn to them, not only to buy the property but to also temporarily fund their project throughout the renovation period, with the added peace of mind that the remortgage away from the bridging finance on to a buy to let deal, is already approved.
Do you need experience to bridge to let?
This mostly depends on the nature of the project. For projects that need a bit of a spruce up, bridging lenders might be happy to lend with little or no previous experience.
But for projects where more work is needed and more can go wrong, such as repairs to structural work and complete refits of the property, it’s possible the bridging lender would want to see a history of successful projects, and potentially a business plan.
Renovating a property is a huge task and should not be taken lightly. If you’re applying for a bridge to let loan for your first renovation project, it might be easier to ease yourself in with a property that needs light renovations as opposed to heavy structural renovations.
These can take a lot of manual labour as well as skill. If you have no experience with building, plumbing or electrics, it can feel really overwhelming when beginning the project, not to mention expensive.
Can I borrow based on the property value when the restoration work has been completed?
The difference between some bridge to let products and standard mortgages is that some lenders will offer loans based on the Gross Development Value (GDV).
GDV is a term used to describe how much the property will be worth once it has been renovated, which of course is usually higher because of the improvements.
This would mean that as a borrower, you could be loaned more money in order to make improvements to the property.
However, you should only ever borrow an amount that you feel that you can afford to repay whether that be by renting the property out, remortgaging it or selling the property all together.
How much can I borrow on a bridge to let mortgage?
The maximum loan amount for bridge to let mortgages is calculated on a number of factors, and is quite different to how traditional mortgages work for residential and buy to let affordability. The bridge element will be calculated separately to the “to let” element, as below:
Calculating how much you can borrow on bridging:
In general, bridging finance can be arranged with no monthly payments, and interest added to the loan when it is taken out, or monthly interest payments can be made and the loan needs to be serviced.
If interest is added on and there is a suitable exit strategy with which to repay the full debt, then there are no requirements for evidencing how the business or individual borrower is going to afford repayments.
If the interest is to be paid monthly, then evidence for how this will be afforded needs to be part of the application assessment.
The key factors for establishing maximum borrowing on the bridge element of the bridge to let, include:
Loan to value (LTV) - Generally, lenders cap loans around 70-80% loan to value (LTV), so a property of £100k would cap lending at £80k for the right borrower.
Property type – if the property is complete wreck then the LTV may be capped to a lower %.
The term – if the loan is being taken for longer, there may be a lower LTV limit with some lenders.
Exit strategy – if there is no clear exit strategy then lenders may not lend at all.
Property use – if the property is currently being lived in by the applicant then this is a “regulated” bridging finance deal, which comes under FCA regulation and has additional requirements and restrictions.
What interest rates should I expect to pay on BTL bridging finance?
The interest rates on buy to let bridging loans depend on the lender and the length of the loan. They can be higher than a standard and can include hefty fees.
For instance, if a loan attracts a 1% arrangement fee and a 1% exit fee, it would add £3,000 to a £150,000 loan. And that’s before you take into account interest, which, if expressed as a monthly rate of 1.5%, that equates to 18% APR, so you can see that getting expert advice is crucial.
If a remortgage is part of your exit strategy, then one of the advisors we work with should be able to help you with current interest rates.
What can you borrow on the let element of a bridge to let?
Affordability on the “to let” element of a bridge to let, is calculated in the same way as a traditional buy to let mortgage, and will be based on the predicted rental yield of the property. The rent then needs to cover the interest only mortgage payments by 125-145%, when calculated at approx. 5-6% rate (usually regardless of the actual rate), with most lenders.
That said, some are more flexible with their affordability models and can lend more than others. For more on buy to let affordability talk to one of the advisors we work with.
What deposit do you need for bridge to let?
The majority of bridge to let lenders will provide a loan of up to 70% which would mean that as a buyer, you could need a deposit of up to 30%, which is the standard rate across the market. Some lenders may go higher in the right circumstances, and at times if a property is undervalued, then a lower or no deposit is possible.
For instance, if a property (say a repossession) is placed on the market for £70,000, but the actual valuation is £100,000, then the bridging finance lender may be willing to lend the full 100% or £70,000 – this is unusual, but it can happen.
What are the fees for bridge to let?
Generally, yes. As well as the interest you’ll need to pay over the duration of the loan, there are often other costs that are associated with a bridge to let mortgage.
The initial valuation for the property
A facility fee, (could be up to 2% of the loan)
An exit fee, (could be about 1% of the loan)
A broker fee (if you took out the loan through one)
Legal costs (for conveyancing of the property purchase and refinance)
How do you apply for a bridge to let?
Bridge to let mortgage lenders assess very different factors to mainstream mortgages when considering your application, and ask questions such as:
Have you ever renovated a property before? (This will be particularly important if extensive refurbishments such as lighting, structural and interior architecture or plumbing need to be carried out.)
Will you be able to refinance or sell the property before the loan period ends? (almost every lender will want you to have an exit strategy ready)
Do you have any other assets? (It may be possible to secure funding against these, and also even if not, if you have no other property some lenders will decline you)
If paying monthly, can you make the interest payments? (Loans set up to be paid monthly will need servicing, whereas rolled up interest can be taken in a lump sum. Either way, some lenders will want to know your income.)
Will the property be easily sold on the market if you are unable to make your renovations and the property remains incomplete?
Your credit history (although bridging lenders tend to be more flexible, certain credit issues can lead to a decline or if not, a higher rate – outlined below)
Other personal details (such as age, address of the property etc.)
Property details (what is the project, what is the property type and construction material etc)
Can you bridge to let with bad credit?
We have spoken to many landlords who have worried that adverse credit will affect their chances of being approved for bridge to let products, as they have a less-than-perfect record of repaying credit commitments.
Thankfully, there are some specialists who cater for all sorts - Below is a list of potential credit issues you may be faced with as a borrower, where it is possible to still obtain bridge to let finance:
Low credit score
County Court Judgements (CCJs)
Individual Voluntary Arrangements (IVAs)
Debt Management Plans (DMPs)
Although these factors may affect your chances of being approved for a bridge to let loan, it doesn’t mean that it is impossible to obtain one with bad credit.
Every lender has different set of criteria that they use to calculate and assess someone’s risk and ability to repay their loan, and there are lenders who may approve you despite any ‘bad’ credit you may have.
Acceptable Bridging loan exit strategies
For bridge to let investments, the “let” element is the exit strategy. It is not necessary to have an alternative plan as part of the agreement, however if someone was to change their mind and sell the property instead of refinance, this would be OK with most lenders so long as it happened before the end of the term.
There may be occasions where the sale of the property is enforced, of course, for instance if the work done on the property to renovate it was not up to standard, and the project went over budget leaving the borrower with no equity or cash left to get the property into a habitable and lettable state.
The only other option here would be an extension to, or remortgage of a bridging loan to another bridging loan (if possible).
Where can I get advice before applying for a bridge to let loan?
It can be really helpful to seek advice from a mortgage advisor before applying as they will be able to research the best lenders based on your property experience, income and credit history.
The expert advisors we work with are highly experienced in this area and will provide you with the right advice on how to apply for a bridge to let loan, as well as taking care of the whole process for you.
Find out more about bridge to let finance
If you like anything in this article or you’d like to know more, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.
The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.
Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
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