How Bridging Finance Can Support Buy-to-Let Purchases
How Bridging Finance Can Support Buy-to-Let Purchases
Despite challenges, the buy-to-let market continues to attract property investors, with an estimated 2.66 million landlords as of 2023. Investors are drawn to this sector by the potential for high returns, but securing the right financing is critical to success. Bridging finance is a valuable tool for investors, particularly with buy-to-let opportunities, where timing and flexibility are essential.
This guide explores how bridging finance works, its benefits, and the scenarios where it can be advantageous for buy-to-let investors. We’ll also discuss key considerations when choosing bridging finance and how it can help you successfully manage buy-to-let remortgages.
What is Bridging Finance?
Bridging finance is a short-term loan designed to ‘bridge’ the gap between immediate financial needs and securing long-term finance, such as a buy-to-let mortgage. These loans typically last between 2 to 24 months and are often secured against a property. Unlike traditional loans, bridging finance focuses on the value of the property and the borrower’s exit strategy (how the loan will be repaid), rather than income.
A typical bridging loan allows investors to borrow up to 75% of a property’s value. Interest can either be paid monthly or rolled into the final loan repayment (useful when you’ve property renovations eating into your cash flow). The flexibility and speed of bridging finance make it ideal for property investors facing time-sensitive financial challenges.
Stephen Clark, founder of Finbri, a Bridging Loan broker, comments, “For buy-to-let investors, the ability to move quickly is crucial, especially in scenarios like property auctions or unmortgageable properties. Bridging loans offer that speed and flexibility, allowing investors to secure opportunities – buying them time to arrange a longer-term BTL mortgage.”
How Does Bridging Finance Differ from Traditional Mortgages?
Bridging finance and traditional mortgages serve different purposes, and their terms (and costs) reflect this. Understanding the distinctions can help you determine when each financing option is most appropriate.
- Loan Term
- Bridging Loans: Short-term (a few months to 24 months).
- Traditional Mortgages: Long-term (typically 15 to 35 years).
2. Speed of Approval
- Bridging Loans: Approval within days or weeks, ideal for urgent needs.
- Traditional Mortgages: Can take several weeks or months to process.
3. Interest Rates
- Bridging Loans: Higher rates (0.4% to 2% per month), reflecting their short-term nature.
- Traditional Mortgages: Lower rates (currently between 4% to 6% annually).
4. Repayment Structure
- Bridging Loans: Typically repaid in full at the end of the term, with the option to roll up interest.
- Traditional Mortgages: Repaid in monthly instalments over the long term.
These differences make bridging loans ideal for short-term, urgent requirements, whereas traditional mortgages are better suited to long-term property investments.
Common Scenarios for Using Bridging Finance for Buy-to-Lets
Bridging finance can be a versatile solution in several scenarios within the buy-to-let sector, offering fast, flexible funding for property investors.
1. Property Renovation
When a buy-to-let property is unmortgageable, such as when it requires substantial renovation or a lease extension, many traditional lenders simply won’t approve a mortgage until the work is complete or the lease is extended. Bridging finance allows investors to fund the purchase of the property and the works required, making the property suitable for a long-term mortgage or sale.
2. Chain Breaks
If you’re selling one buy-to-let property and purchasing another, but the sale is delayed, bridging finance can help cover the gap, ensuring you don’t miss out on securing the new property.
3. Auction Purchases
Properties bought at auction often need to be paid for within a short time frame—typically 28 days. Bridging loans can provide the necessary funds quickly, allowing investors to meet this deadline and arrange long-term finance afterwards.
4. Urgent Refinancing
If an existing mortgage deal is expiring, or a lender withdraws their offer unexpectedly, bridging finance can provide an immediate financing solution, giving you time to secure a more favourable, long-term option – saving you from losing the property.
Benefits of Bridging Finance for Property Investors
There are several advantages to using bridging finance in the buy-to-let market, particularly when speed and flexibility are crucial.
- Fast Access to Funds: Bridging loans can be arranged in as little as a few days, ensuring you don’t miss out on valuable property investment opportunities.
- Flexible Repayment Terms: Many lenders allow interest to be rolled into the loan, which helps investors manage their cash flow effectively until the property is sold or refinanced.
- High Loan Amounts: Bridging finance can be secured against high-value properties, making it suitable for large buy-to-let investments.
- Variety of Uses: From refurbishments to refinancing, bridging loans can be used for various purposes, making them a versatile tool for property investors.
Risks and Considerations When Using Bridging Finance
While bridging finance offers many benefits, there are also risks to consider. Understanding these risks can help you make an informed decision.
- High Interest Rates: The interest rates on bridging loans are higher than those on traditional mortgages, so it’s important to factor this into your financial calculations.
- Short Repayment Period: Bridging loans are short-term by nature, meaning you’ll need a clear exit strategy, such as refinancing or selling the property, to repay the loan.
- Additional Fees: Arrangement fees, valuation fees, and legal costs can add to the overall expense, so it’s essential to account for these in your budgeting.
How to Secure Bridging Finance for Buy-to-Lets
If you’ve decided that bridging finance is the right solution for your buy-to-let investment, there are several steps to securing a loan.
1. Research the Market
Compare offers from different lenders to find the most suitable terms for your needs. Each lender will have varying loan-to-value ratios, interest rates, and fees.
2. Consult a Specialist Broker
Working with a specialist broker can help you navigate the complexities of bridging finance, ensuring you find the best loan for your circumstances.
3. Prepare a Strong Application
Ensure your application is robust by providing detailed information about your financial situation, the property, and your exit strategy.
Final Considerations
Bridging finance is an invaluable tool for buy-to-let investors, providing the speed and flexibility necessary to navigate time-sensitive property deals. Whether you’re purchasing at auction, renovating a property, or managing a financial gap, bridging loans can help you take advantage of opportunities that require fast access to capital.
By weighing the benefits and risks, and having a solid exit strategy in place, you can leverage bridging finance to achieve your BTL goal.