Build to Rent Mortgages Explained
Looking to build a property specifically for long-term rental? Here’s how you can invest and finance a project like this in the best way possible.
Author: Pete Mugleston
CeMAP Mortgage Advisor, MD
If you’re planning to build an investment property with the end goal of renting out, you might be at the stage of researching development finance options. One solution could be a build-to-rent mortgage, but there are some important things to understand about these loans.
This guide covers everything experienced landlords and first-time investors need to know. We’ll explain the build-to-let mortgage process, how to invest, and where to get expert support for your rental property goals.
Keep reading for all the details, or click on the link below to jump straight to a section…
What is build-to-rent finance?
This isn’t a specific type of loan or mortgage product. It refers to short-term, interest-only financing available to investors and developers looking to build a buy-to-let (BTL) property purpose-built as a private long-term rental. Sometimes, this will also be referred to as ‘build-to-let’, but both terms mean the same thing.
Most build-to-rent schemes are set up as long-term investments by property development firms or organisations like pension and insurance companies. As a result, build-to-let finance (not technically a specific mortgage type) will be aimed at experienced developers. But there can still be ways to invest without direct experience.
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How does it work?
Build-to-rent (BTR) financing is similar in many ways to a self-build buy-to-let (BTL) mortgage. The loan would be structured so that you can access funds while developing and building the rental property, and then once it’s finished, you’d move on to a standard BTL mortgage.
Build-to-rent loans tend to have term lengths of up to around 24 months. They’re mostly used as a tool for developers to create and build projects designed to house long-term renters. This includes apartment buildings with communal facilities and sometimes shared areas or outdoor spaces for tenants.
These features can make this type of property a solid investment that attracts higher rental prices than other accommodations. Depending on the size of your particular project, you may be able to build a multi-freehold property with a single buy-to-let mortgage from a lender to cover the whole building.
For larger projects with more than 10 units or additional on-site amenities (like a gym, shop, or security), you may need to approach a commercial buy-to-let lender to finance your build-to-rent investment.
How to invest in build-to-rent
Securing build-to-rent investments in mortgages or loans will always be reviewed on a case-by-case basis. But, there are some steps you can take to give you the best chance of securing the finance you need to make your property development investment goals a reality:
1. Gather your documents and plans
Your first step is to get hold of all your standard documents, such as photo ID, proof of address, and any relevant financial documents relating to you or your business. You should also hand in your initial property development plans, site locations, and cost estimates, along with any evidence of successful past projects.
2. Speak with a broker experienced in build-to-rent finance
Get matched with an experienced mortgage broker who can help secure finance, review your specific circumstances and goals, and then direct you on the next steps to securing investment.
3. Apply and access funds
After helping you prepare your application, your broker will introduce you to a suitable lender so that you can start accessing funds and get your rental development project underway as soon as possible.
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Eligibility criteria and deposits
As mentioned, build-to-rent finance is normally aimed at larger developers and organisations, but not always. If you want to explore build-to-let as a potential investment, here are some important factors relating to mortgage eligibility and deposits.
Deposit: Put down a larger deposit to lower your loan-to-value (LTV) ratio and reduce the perceived risk for some lenders. So, a bigger deposit could increase your chances of acceptance or lead to more favourable rates and terms. However, there are development finance lenders who will fund 100% of construction costs or even complete 100% LTV financing if you have other assets to use as security for the loan.
Previous experience: lenders are more likely to offer this type of finance to developers or landlords with a proven track record of similar successful past projects. In their eyes, financing your build-to-rent apartments is a better potential investment. But, if you’re a first-time developer, there can still be creative ways to secure investment and loans.
Exit strategy: to qualify for a short-term build-to-rent loan, you’ll need a suitable exit strategy. This is your plan to pay off the remaining debt at the end of the term. The most common strategy is to refinance once the property development is complete and move on to a buy-to-let mortgage. But, the strength of your rental property will be key.
Rental property plans: if you approach lenders with a hastily prepared plan for your property development, this will reduce your chances of securing build-to-rent finance. If you take the time to create a thorough and detailed proposal with the guidance of industry experts, you’ll improve your likelihood of success. Details of rental projections, occupancy forecasts, and a strong business model will show lenders you’re serious.
Planning permission: You’ll often need planning permission before lenders will discuss investment and financing for the build-to-rent project.
Your credit: with property investments like this, your credit score won’t play as much of a role as it would with other types of mortgages and finance. However, it’s still worth downloading all your credit reports ahead of time to correct any mistakes. Lenders often consider bad credit applicants if your adverse credit doesn’t impact the exit strategy.
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Pros and cons of build-to-rent
Using this type of loan to finance your build-to-rent project has some potential benefits and drawbacks.
Advantages
The rental market has proven to be a solid form of investment and future forecasts remain positive.
Purpose-building apartments for long-term renting can provide a more stable and consistent form of income.
It can be possible to access government build-to-rent schemes like the housing guarantee scheme to support your investment.
If you deal with the right development finance lenders, they’ll fund the majority of your build to rent investment with a small amount of upfront capital from you.
Build to rent apartments and facilities can have a positive impact on the local community and even drive up property prices.
Disadvantages
A large, purpose-built rental can be difficult to sell in future.
Accessing the initial capital can be challenging if you don’t know where to look and many short-term borrowing solutions come with high interest rates.
Build to rent is typically a long-term investment where you may not see positive returns for some time.
Creating a plan and securing finance can be difficult to achieve without expert advice and guidance.
Most traditional lenders and high street banks won’t offer build to let finance. Or, it can take an extremely long time, causing building delays and driving up your budget.
Build-to-rent lenders
Finding a suitable lender to finance your build-to-let development can be challenging because each deal will be discussed on a case-by-case basis, and there is no universal way to secure investment.
To give you an idea of some options, here are a few lenders who are known to be open to discussing build-to-rent finance:
- United Trust Bank - Development loans up to 60% of GDV (Gross Development Value).
- Pluto Finance - Loans of between £7 million and £70 million, but only in England and Wales with a 60% maximum LTV.
- BLG - Lending up to 70% LTV on build to let loans between £1 million and £10 million for three or more units that have planning permission secured.
Not many lenders who offer build-to-rent finance will advertise options publicly. And, you often need an introduction from a trusted broker to discuss investments of this scale. Speaking to a specialist development finance broker is your best course of action if you want to find the right lender that suits your property investment goals.
Speak with a build-to-rent financing specialist
Discussing your situation and plans with an experienced mortgage broker is the best way to find a bespoke financing solution for your build-to-let property development.
We offer a broker-matching service. This means we’ll quickly assess your needs and then introduce you to a specialist broker who can help you secure a loan or finance for your build-to-rent investment.
Just call 0330 818 7026 or make an enquiry. We’ll set up a no-obligation chat between you and a specialist development finance broker today.
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FAQs
It can be possible, but some lenders will have restrictions around the locations they’re willing to work with. Some locations will be better than others from an investment perspective, so this may also be a factor.
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Pete Mugleston
CeMAP Mortgage Advisor, MD
Pete, a CeMAP-qualified mortgage advisor and 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 successfully went the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained and 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 Online Mortgage Advisor of course!
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