Should buy-to-let landlords use bridging finance?

Many landlords are looking for unique forms of finance to continue investing in the private rental sector.

The rise in popularity of less conventional finance options could be in response to the Bank of England’s decision to restrict buy-to-let lending through tighter borrowing rules and stricter affordability tests.

84% of brokers were unable to find a buy-to-let mortgage for some of their clients in the final quarter of 2016, a new survey revealed. 27% of Brokers said that affordability was the main reason. A further 20% revealed that clients with adverse credit were struggling to get buy-to-let mortgages and another 20% put blame on consumer buy to let regulations.

Bridging loans are short term secured loans designed to bridge cash shortfall when buying a property and demand for these has accelerated in recent months.

After being unable to raise a buy-to-let mortgages, where time is the essence, 69% of brokers chose bridging finance, while 8% opted for secured loans.

The main reasons for why bridging loans were taken out in the fourth quarter of 2016 include to refurbish a property (31%) and for development projects (15%). The South East experienced the greatest demand for bridging loans in the UK at 50%, an increase of 21% since quarter three.

Bridging offers faster time to completion than many high street lenders and is expected to outpace traditional mortgages.

However, landlords need to be aware that bridging finance can be very expensive. This means interest repayments are much larger compared to a long-term financing mortgage.

75% of brokers experienced an increase in bridging loan volumes in 2016 compared to the previous year and 69% expect a further rise in 2017.

Source: Property118