Bridge To Let
In an article that we posted last month, entitled “Refurbishment Finance” the narrative mentioned the recent BTL tax changes which are negatively affecting landlords. The changes were announced in the budget of 2015 and implemented through an instrument in UK Tax Law called “Section 24”. The changes have been sensationalised in the press and caused a lot of misunderstanding. Whereas as the facts of the changes are simple, the taxation effect is only on higher rate taxpayers, but it has nonetheless caused enough uncertainty to put off many existing landlords as well as new entrants to the market. Obviously for higher rate taxpayers it does mean a reduction in the profitability. The body of the text explored how some landlords were using bridging finance to purchase projects for refurbishment, in order to add capital value to what may be a slightly lower income return resulting from the income tax changes.
In this article we look at a variation on standard bridging finance, termed “Bridge to Let”. Brokers are using this product to help landlords purchase and renovate tired, un-mortgageable properties that will be retained as a BTL investments.
Bridging Finance: Exit Risk
In the past bridging finance was used almost exclusively by investors to purchase properties and to do the refurbishments. The lenders in this market were and are conventional bridging lenders lending for development and with no interest once the refurbishment was done and certainly no intention of converting to a long term BTL mortgage. If landlords wished to retain the property as an investment for letting, then a new BTL mortgage needed to be organised with a standard BTL lender with all the costs, survey and conveyancing implications.
This of course created a risk in that a BTL “exit” loan may not be available, given that the underwriting criteria for bridging loans is quite different to that for BTL mortgage lending. The property, loan size and even the borrowers themselves may not “fit” the BTL lender criteria. Whereas it is always advisable to check the BTL mortgage suitability before searching for a bridging lender, many people did not, which proved a costly mistake.
Finding that the expected exit was not available or delayed, could lead to delays in redeeming the bridging loan, leading to penalty interest or worse, repossession and a forced sale.
Enter the “Bridge to Let” finance product
How does it work?
In short, it’s a development bridging loan product, with a decision in principle for a buy to let mortgage product attached, as the refinance exit; no risk, all pre-approved, usually no extra costs, one lender, two products, wrapped into one application.
Effectively, the loans are underwritten simultaneously against the lenders the individual criteria for each product type. So, the bridging loan, with or without its stage payment, and including the gross interest rolled-up, will be underwritten to the lenders max allowable LTV. Then the buy to let mortgage, using the standard calculations of rent plus safety margin versus monthly mortgage payment are done (these are known as income cover ratio (ICR) calculations). This is to ensure that the loan is well covered by rent.
Who are the providers of Bridge to Let Finance?
Small specialist lenders and “Challenger Banks” have always looked for niche markets and bridge-to-let is an example. It is a win win all round; it benefits BTL landlords by providing certainty, and the Banks get two pieces of business for one set of marketing
Benefits of Bridge to Let
- Peace of mind, knowing in principle that if the project is delivered as specified, an exit is available
- Allows the purchase of buy to let properties which are effectively mortgageable day 1, albeit that there is a refurbishment to be done before they can be let.
- Costs. Most BTL lenders will not allow a re-mortgage of a property, unless it has been owned for 6 months, so if it was a quick refurbishment the landlord may have to stick with the bridging lender for 6 months at high interest rates.
- Costs. Although a survey will be required at the end of the refurbishment, all the costs of changing to a new lender will be avoided
- Communication. Dealing with one lender should make the process simpler, quicker and more predictable
At this point it’s important to clarify that although the risk of there not being an exit available from the bridge is lessened, it is not completely removed. If for some reason, on completion of the renovation, the surveyor says that it’s not been completed in accordance with, for example, the planning permission, or that the final value put on the property is below what was predicted, or that a cost overrun means the required BTL loan no-longer meets the ICR calculation, or the required BTL loan exceeds the maximum LTV, then the lender can refuse the BTL loan.
Landlords looking to add value by tidying up run down properties, that can then be let, should certainly consider looking at lenders who provide a “bridge-to-let” product. Speed, a level of guarantee and peace of mind are quite a strong argument in favour.
Bridge-to-let is particularly useful for landlords purchasing properties that can be made lettable relatively quickly where sometimes BTL lenders require property to held for 6 months.
However, it must be stressed that the products do have some shortcomings and need careful comparison. Bridge-to-let products will not always be the most competitively priced and the overall package still need to be carefully considered.
As always, we recommend that you use the services of a professional Broker.