Buy to Let Bridging
Scott West explains how Buy to Let bridging works.
Can I get a bridging loan on a Buy to Let? How does it work?
Yes, you absolutely can. We often refer to this as a ‘Bridge to Let’. It's a short-term loan used to purchase or refinance a property that isn't currently suitable for a normal Buy to Let mortgage.
In some cases they are used to refurbish and increase the rental yield on a property. With a Bridge to Let you can do that refurb with a pre-agreed exit strategy with the lender. You then get a Buy to Let product at the end.
Why would you need a bridging loan to purchase a Buy to Let property?
There are several reasons. Typically, the property needs refurbishment. It could be that the property is lettable, but it's a bit tired and dated and you want to maximise the rental income from it. By increasing the value, a refinance gets you more money back out against the purchase price.
Or, you could be buying a property at auction, which usually comes with a 28-day turnaround time. Those are the two main reasons we see clients need bridging finance.
What is an exit strategy? Why is this important? Do I need an exit strategy to secure a Bridge to Let?
An exit strategy is how you plan to repay the bridging lender. In the case of a Bridge to Let product, the exit is built in.
It's two separate products, but from the client's perspective, it’s a single unit. The bank will underwrite the bridging loan and the exit strategy at the same time.
You might be buying a property for £100,000 and spending £20,000 on a refurb. When finished, it'll be worth £150,000 and will rent for £1,000 a month. A lender looks at the viability of the bridging part. Is what you're spending reasonable? Is the Gross Development Value likely to be reached? Are you likely to get to £150,000 at the end?
Then they look at the Buy to Let side based on the £1,000 a month rental income. Does that cover the loan costs? They'll underwrite both portions and then confirm once it's approved. As long as you action the refurbishment correctly, you'll get the exit.
There’s comfort in that for both you and the lender. You're guaranteed to get the borrowing at the end and the bank is happy because they're going to be repaid.
How much deposit do I need for a bridging loan on a Buy to Let?
For the bridging loan portion, which is the front end of this particular product, most lenders will go to 75% gross. So after deduction of costs and interest, you will probably need around a 30% deposit - because they'll retain some element of the interest.
How much can you borrow on a Bridge to Let mortgage?
The borrowing will be limited to the Loan to Value of the property at the point of acquisition or refinance at the start of the bridging loan. It'll be capped at 75% of the value. When you come to the Buy to Let, you're likely to have added some value to the property.
So the mortgage will be 75% of that new value, which means you should receive some money back out at that point.
What are the fees and costs for Bridge to Let?
Always account for a 2% arrangement fee paid to the lender, which is added to the loan. There’s a valuation fee which can vary depending on the value of the property, but is often around £500 to £1,000.
If you've got a very large property and you're doing a major refurbishment, that may require more valuation as the report will be more detailed.
I would budget £2,000 for legal costs. With bridging loans, you pay for both yours and the lender's legal costs at around £1,000 each.
The monthly interest on the bridging side will be retained, so the lender keeps back some of the money - that 75% we talked about earlier. The interest can vary between 0.6% and 1.2% a month, depending on how good the asset currently is, its location, your credit position and what the exit looks like.
Can I get a Bridge to Let loan with bad credit?
Yes. There are lenders who cater to applicants with poor credit. You’ll still have some options as long as the property has value, is rentable, lettable, and your exit strategy stacks up - that is, the rental income covers the loan amount required at the exit. The rates will be higher and the arrangement fees might be slightly higher, but it can still be done.
How does remortgaging work in this case?
Once you've done the refurb and the property is ready to let, you advise the lender that you're finished and want to trigger the conversion to a Buy to Let product.
We submit an application form, and the property may need revaluing to confirm that the work's been done and the value is as expected. The rental income also needs to be confirmed.
If you’ve had a bridging loan for a long time due to an extensive refurb, the market might have changed and the valuation report will need to be done again. From there, it goes through the usual processes. The valuation report comes back, it's underwritten, an offer comes out and you go to legals. It should be relatively painless at that point.
What are the pros and cons of using a bridging loan for Buy to Let?
The pro is fast access to funds. It gives you the ability to buy an unmortgageable property - an asset that’s not suitable for letting currently, needs significant refurbishment, or even has structural damage that needs to be repaired.
You can buy those with a bridging loan, where you can’t get a Buy to Let mortgage outright.
There is also good flexibility around timing and your exit strategy, depending on your business model.
The disadvantages are slightly higher interest rates and short repayment periods, typically 12 to 18 months. It can go to two years, but that’s rare.
Bridging is risky if the exit falls through. If you're unable to complete the refurbishment and you're left with a property that's not lettable or saleable, you can end up with a debt against it that you can't redeem. You need to be very mindful of that, and make sure the project is viable from the outset.
Interest rates can be higher, risks can be higher, but the returns are also higher - so it depends on your attitude to risk, as well.
How do I apply for bridging to purchase a Buy to Let?
There are the usual basics - we'll need proof of ID (typically a passport), proof of address (usually a driving licence), and a bank statement showing your deposit if it's a purchase. You also need a clear exit strategy, explaining whether you're planning to sell or refinance.
Typically it's a Bridge to Let, in which case we need to understand what the rental income is likely to be. We also need your credit report to check exactly what the lender will see - so we pick the right lender from the start.
Next we need an estimate of any refurb works. Get two or three builders’ quotes in as estimates. If you've got experience, you might mock it up yourself. The key point is to find the correct broker - so that you end up with the right lender, the right package, and hopefully a painless process.
How can a broker help? Any final thoughts?
Brokers are key in this. Some lenders won't deal with you directly and are broker-only, so a broker allows you to access everybody in the first instance, giving you a wider choice of options.
By identifying lenders that will suit you, and through connections and relationships at those lenders, we can ease the pain points you might find.
Sometimes we can negotiate rates and fees down, depending on the case. We can also help plan your exit strategy. Although some lenders offer a Bridge to Let product, the most suitable option for you might be to bridge with one lender and choose another for the exit, if that works better for cost efficiency. There are lots of things to consider that a broker will cover off for you.
Key Takeaways:
- Bridge to Let loans are short-term loans for purchasing or refinancing properties unsuitable for standard Buy to Let mortgages, often used for refurbishment to increase rental yield.
- Bridging loans are typically needed for properties requiring refurbishment or for quick purchases like those at auction (28-day turnaround).
- An exit strategy, which is how you plan to repay the bridging lender, is crucial; this is built into a Bridge to Let product, with the bank underwriting both the bridging loan and the exit strategy simultaneously.
- For the bridging loan portion, a deposit of around 30% is usually required, as lenders typically go up to 75% gross Loan to Value (LTV) and retain some interest. Borrowing is capped at 75% of the property's value at acquisition.
- Brokers are essential as some lenders are broker-only, providing wider access to options. They can help identify suitable lenders, negotiate rates and fees, and plan exit strategies for cost-efficiency.
SOME BRIDGING FINANCE IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.