Bridge-to-Let Loans: A Guide to Bridging Loans in the Buy-to-Let Market

• Rising Interest Rates: With the bank of England increasing interest rates to combat inflation, mortgage costs for buy-to-let properties have risen. This is squeezing margins for investors, who rely upon secured lending, making it more challenging to maintain profitability.
• Regulatory and Tax Changes: The government has introduced stricter regulations and tax policies targeting the buy-to-let market. In the UK, mortgage interest tax relief has been reduced, and there have been increases in stamp duty for additional properties. These changes have reduced net returns and deterred some new investors.
• Growing Demand for Rental Properties: Despite the challenges, demand for rental properties remains high, driven by factors such as affordability issues for first-time buyers, lifestyle preferences, and demographic shifts. This demand supports rental prices, offering a cushion for investors against rising costs.
• Focus on Energy Efficiency and Sustainability: There is increasing pressure on landlords to improve the energy efficiency of their properties, driven by new regulations and tenant preferences. Properties with poor energy performance are becoming less attractive, prompting investors to upgrade or focus on higher-efficiency homes. The Domestic Minimum Energy Efficiency Standard (MEES) Regulations set a minimum energy efficiency level for domestic private rented properties. Currently, the minimum energy efficiency standards (MEES) allowed for rented properties are a minimum of an E rating on their Energy Performance Certificate (EPC). The new EPC regulations would mean that from 2025, your rented property would need to have a certification rating of C or above.
• Impact of Technology: Property technology is playing a larger role, offering tools for managing properties, finding tenants, and handling compliance more efficiently. This trend is helping landlords streamline operations and reduce costs.

A short-term loan secured against residential investment property that is currently, or will be, rented out. The biggest advantage of a bridging loan is the speed in which it can be arranged, allowing cash to be available within a very limited timescale. Bridging loan funds have been paid out by BIG Property Finance in a matter of days, whilst a high street lender would normally finalise a mortgage 6 weeks at the fastest. Another key feature of a bridge-to-let loan is that they are only intended to be utilised in the short-term, with most loans on a term of one to eighteen months. Whilst many mortgages will now run for up to 35 or 40 years. This in turn means that there needs to be an intended repayment vehicle for a bridging loan. Whilst a mortgage is regularly structured on a capital repayment basis, where the monthly payments pay down the added interest and gradually reduce the outstanding capital, a bridging loan would only be repaid in full at the end of the loan term. A serviced bridging loan might still be a possibility, if the monthly payments are affordable with the borrower’s current income, allowing them to clear the accrued interest each month. However, the borrower will still need to have a clear exit strategy to the loan, so that they can pay back the funds borrowed with any outstanding fees or interest.

How Bridge-to-Let Loans Work

Here’s the step-by-step process on how bridging loans function in the buy-to-let market.

1.     Find a suitable investment property within budget and agree a purchase.
2.     Initial bridging loan phase: Short-term financing for property purchase or renovation.
3.     Complete refurbishment/repairs to prepare property for rental.
4.     Refinance to a term loan: Switching onto a longer-term buy-to-let mortgage once the property is ready to rent. Using the rental income to make monthly payments.

Costs associated with bridge-to-let loans: It is important to mention that bridging loans aren’t considered to be the cheapest form of finance, as you pay for the convenience. The current average mortgage rate for a five-year fixed rate mortgage is 4.68%, according to the site ‘Rightmove,’ with bridging rates averaging 10.32% annually! You also need to consider legal fees, valuation costs and potentially broker fees, arrangement fees or exit fees. Added fees and extra costs can be a feature of many forms of lending, but at BIG we are always transparent upfront on what is payable.

Benefits of Using Bridge-to-Let Loans for Landlords and Investors

Bridging loans help in seizing time-sensitive opportunities. Such as purchasing a property at auction where there are normally only 28 days to complete.

Flexibility in property investments: Funding renovations, refurbishments, or conversions. The funds raised from a bridging loan can normally be utilised for multiple purposes, whether it’s the capital required to purchase a property, money to fund refurbishments or extra cash to extend the lease or apply for planning permission.

Expanding property portfolios: Using bridging loans to acquire undervalued or distressed properties. Sometime multiple properties may be sold together or un-mortgageable properties requiring extensive renovations.

Market competitiveness: Staying ahead of other buyers by securing properties faster. If you can act quickly in a property transaction it can help you secure a property at a competitive price without the delays of a traditional mortgage. Allowing you to compete against cash buyers with immediate funds.

Case Study 1: Renovation of a Distressed Property

We have recently provided bridging-to-let loan funds for a landlord to purchase a distressed property at auction, renovate it quickly, and refinance onto a buy-to-let mortgage. = The money facilitated the purchase of a residential property, in Birmingham, at auction. No formal valuation was obtained due to tight time frame and low LTV (sub 50%.) The property was to subsequently be refinanced following renovation works.

The outcome was a rapid property acquisition and increased property value post-renovation.

Case Study 2: Portfolio Expansion – Temporary capital requirements

Bridging loan completed to support the purchase of a residential property with further unencumbered property provided as additional security. Whilst the borrower did have the cash to purchase, they were shortly commencing a development project close by and the lender required them to evidence “cash in the bank” to be able to access the facility. Therefore, our loan supported this temporary cash flow requirement.

The outcome was that this loan enabled the investor to secure property quickly before other channels of cash flow were available, so they didn’t miss out on the business opportunity.

Case Study 3: Bridging the Gap for Property Conversion

A buy-to-let investor used a bridging loan to convert a commercial property into two residential units. The terrace property was previously occupied as a nursery setting, the borrower was set to obtain planning permission to return the building back to two individual residential terrace houses then rent each residence on an AST. Funds were used to finalise planning permission and needed to complete the renovations before a standard BTL mortgage could be secured.

The outcome, increased rental income potential and diversification of the property portfolio.

• Key considerations to be aware of when taking out a bridging loan is that there are risks associated with this short-term lending. Interest rates on bridging loans are higher than that of a term mortgage. The restricted term also means you have less time to amend your exit strategy if your original repayment method doesn’t come to fruition, this can put you at risk of default. A bridging loan offer is still subject to further due diligence and often a valuation. Whilst you may have a loan initially agreed, terms are subject to further due diligence on yourself as the borrower/your company as well as the property and the completion of legal work. If something is uncovered later that impacts a lender’s perspective on the risk of your loan, terms may need to be revised or withdrawn. This can then leave you in an urgent transaction that is without funding, at short notice, so always be clear of your options.Tips for mitigating risks
  •   Ensure you have a clear exit strategy with detailed timeline and alternative options.
  •   Work with experienced and trustworthy lenders who have transparent criteria and clear processes.
  •   Conduct thorough property and market research to ensure you are obtaining the right form of finance for you with the right criteria.

In conclusion, the benefits of using bridge-to-let loans in the buy-to-let market is that it can give you an advantage over the competition by allowing you to act quickly in a property transaction. A bridging loan can also buy you time to find a more long-term solution to a temporary financing issue whilst facilitating the growth of your business or property empire.

So if you are a landlord or property investor, will you consider bridge-to-let loans as a strategic tool for portfolio expansion? Seek professional advice to explore bridging loan options that align with your investment goals.

Have you considered contacting a financial advisor or a mortgage broker to get personalised advice? For more information on your bridging finance options, contact BIG Property Finance on; info@bigpropertyfinance.co.uk – 0121 348 7830.