What Is Bridge To Let Finance?
Bridge to let finance loans are designed for the buy to let property market, to allow investors to buy a property they would otherwise struggle to finance with a traditional mortgage. At its most simple, bridge to let loan refers to bridging loans that fund the initial purchase of rental properties, usually those requiring refurbishment or, in some cases, further refurbishment works. You might find it called a number of different things, but, by any name, it can be a convenient and cost-effective option for landlords or property developers taking on a new project.
The idea is an almost seamless transition from the specialist funding – the bridging loan – needed to secure a property ineligible for a standard mortgage, to its exit onto buy-to-let finance.
Sometimes people may not be completely confident with their existing refinance arrangements or want the option to retain a property on some longer-term finance once their bridging term has finished. We developed our bridge to let loans following discussions with some of our clients. They told us that while bridging loans are great on ‘day one’, they also wanted extra certainty that when the loan came to end, they would still have the added security of a finance option with us. So, we secured a product that gave them precisely that.
Here’s how it works:
The first period of the loan is a bridging loan, without early repayment charges.
This is followed by a fixed term for a set period of time.
The rates are fixed on day one.
No additional underwriting is carried out when the bridging loan finishes, and the term loan begins.
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 obtain a bridge to let?
This mostly depends on the nature and sometimes the location of the project. For projects that need a bit of a spruce and tidy up, bridging to let 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 major structural work and complete refits of the property, it’s possible the bridging lender would want to see a history of successful projects, or a partner that has this project experience and potentially a business plan.
Renovating a bridge to let 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 and or maybe use an experienced project partner if possible.
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 finished and completed?
The difference between some bridge to let lender products and standard mortgages is that some lenders will offer bridging 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 which is a great advantage.
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 would i be able to 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 advisor’s 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 finance product?
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
- Mortgage Arrears
- 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 rentable state.
The only other option here would be an extension to, or remortgage of a bridging loan to another bridging loan (if possible).
Are you eligible?
Different lenders will have different eligibility criteria – a key example being whether or not they will offer bridge-to-let mortgages to first time landlords/developers. Some will have standard criteria, while others will take a case-by-case approach, usually based upon the nature of the project and/or the level of renovation required.
Other factors lenders will assess – in addition to a number of those you’d expect in a standard mortgage application – are likely to include: the current condition of the property, your plans for its refurbishment/development, the extent of work to be undertaken.
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, make an enquiry here on our Contact Form.
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.
Click here for next page Bridging Finance Refurbishment