Mortgages that allow a property investor to buy and repair a run down property and then add them to their rental portfolio are extremely popular.
These schemes package a bridging loan, for the initial purchase, with a buy to let mortgage, which provides the exit via a long term mortgage.
Bridge to let finance is ideal for auction purchases and where the property is uninhabitable.
What is a bridge to let mortgage?
While most bridging loans are perfect for developers who want to buy, refurbish and sell, bridge to let mortgages are designed for landlords who will be keeping the property to let out. If your intention is to sell then a buy to sell mortgage will be more appropriate.
If a property is run down you will find that most mortgage lenders will not want to lend. No kitchen or a functioning bathroom does not fit in with the criteria for a buy to let lender. These lenders prefer a habitable property that can be let out upon completion.
Bridging loans are suitable for purchasing run down properties, below market value properties and properties bought at auction. But they need an exit strategy and if you intend to keep the property you need to apply for longer term finance to accomplish this.
A bridge to let mortgage combines a short term bridging loan (for the purchase), with a buy to let mortgage (for the exit) in one convenient package. This solution creates a smooth transition from the specialist bridging finance over to the pre-approved buy-to-let mortgage.
How does a bridge to let mortgage work?
Bridge to let mortgages essentially offer 2 types of property finance, packaged together in one application from one lender.
- The bridging loan
- The buy to let mortgage
The bridging loan is used to finance the purchase of the property. Often these properties are delapidated and not fit to be lived in. This is exactly the type of business that bridge loan providers like. And as we know they can be set up very quickly.
Once owned you can begin the refurbishment process. During this period you don’t need to worry about applying for the BTL mortgage as it is already approved and waiting.
When the works are finished the lender will want to re-look at the property. Once they are happy with its condition the buy to let mortgage is used to repay the bridging loan and then you can install some paying tenants.
You apply for the bridging loan and the long term traditional mortgage at the same time, with the same lender and so the property purchase will only happen once you have approval for both types of finance.
When would you use a bridge to let loan?
Bridging loans provide a solution to a short term cash flow problem or delay, and they are used to bridge the gap until the funds arrive. One popular option would be to use it to break a property chain so you can proceed with your intended purchase.
For investors it would be used to purchase a property quickly or purchase a property that needs major renovation work. In both of these cases a standard buy to let mortgage will either not be suitable or would not be ready in time.
If the intention is to renovate the property and keep it as a buy to let investment then a bridge-to-let mortgage might be a good solution. It joins a bridging loan with a normal buy to let mortgage for a seamless transaction.
AUCTION PURCHASE
When buying a property at auction you need to be able to come up with the completion funds quickly. With most property auctions you will be putting down 10% on the day with the rest due in 28 days.
A bridge-to let can fit in with this tight timeframe.
Read our Guide to Property Auction Finance
UNINHABITABLE PROPERTIES
A standard mortgage won’t be approved for a property that cannot be lived in.
In these cases a bridge to let can provide the finance for the initial finance, bridging lenders are fine with houses like this, and then this converts to a long term mortgage once the property is finished and ready to be let to tenants.
PROPERTY CONVERSIONS
With conversions a bridge to let can help in a variety of ways:
COMMERCIAL PROPERTY – This can include taking a commercial property and converting into residential units.
LARGE HOUSE – Converting a large house into separate flats.
BUILDING WORK – It is suitable for major building work including extensions and loft conversion.
Do I need experience to bridge to let?
Financing is available for:
- Experienced landlords and investors
- First-time developers
- Limited companies including SPVs
Where the intended work is relatively light and non-structural then the lenders will be happy for a first time developer to apply.
If the work is major and includes structural work then they may want to see some previous experience of this or see some evidence of who will be undertaking the work.
How much can I borrow on a bridge to let mortgage?
Mortgages are available upto 70-80% loan to value (LTV), this will be affected by the condition of the property.
The ‘bridging’ part and the ‘let’ part are assessed separately and the buy to let mortgage (your exit) is still calculated using the AST rental income. Your credit score is still important to the lender but loans will be granted even if it is less than perfect.
The initial bridging finance can be arranged so that the interest rolls up, this is great for cashflow but don’t forget that it increases the overall debt that needs to be repaid.
5 reasons why
- Bridging loans are fast and flexible, they let investors take advantage of opportunities that the high street lenders can’t help with.
- Pre-approval of the BTL mortgage means that an investor has their exit strategy sorted.
- When applying for a bridging loan and buy to let mortgage with separate lenders you will need to pay 2 sets of arrangement fees. With a bridge to let (with one lender) there’s only one arrangement fee.
- Some lenders will offer finance against the GDV, so you can borrow against the improved value.
- Due to the ‘six month rule’ it is very difficult refinancing a property onto a longer term mortgage where you have owned it for less than 6 months. This problem is avoided with a bridge-to-let.
Frequently Asked Questions
You’ve probably got your own questions as well.
A bridge to let mortgage is incredibly flexible and could be used for: buy to let properties, holiday lets, HMO’s and commercial to residential conversions.
There is no need to have a separate exit strategy. For a bridge to let the exit strategy is transferring the debt over to a long term buy to let mortgage. This is pre-approved and forms part of your mortgage application to the lender.
This will depend on how poor your credit status is. It needs to be strong enough to qualify for the buy to let mortgage. We have access to lenders who are sympathetic to these types of issues.
You will find that most of these types of schemes are offered by specialist lenders who prefer to work with experienced bridging loan brokers like Drake Mortgages. Our advisers can source you a great deal and then help to get everything set up.