How bridging loans can help buy-to-let investors

Friday, 30 March 2012 03:49

Bridging finance is one of your options

The difficulties experienced by the housing market over the last three years have been well documented, however, while the wider market struggles, the buy-to-let sector has enjoyed something of a boom.

With mortgage lenders demanding huge deposits from first-time buyers, many of those who would have been able to buy in previous years have been forced to live in rented accommodation.

The high demand for rental homes has seen average rents increase significantly and landlords are enjoying some of the highest yields for years.

If you are keen to take advantage of the situation, you need to explore the different finance options available to you. These include buy-to-let mortgages and bridging loans, among others.

Many of those who enter the buy-to-let market opt for the latter option and there are several reasons for this.

One of the main reasons has to do with the greater flexibility associated with bridging finance.

When it comes to obtaining a buy-to-let mortgage, there are certain criteria that you must satisfy before a lender will agree to finance your venture.

One stipulation is that the property has been owned for a period of at least six months. This means that if you want to purchase a property and rent it out straight away, you will be unable to if you choose a buy-to-let mortgage.

Bridging loan companies, on the other hand, have no such demands. Provided you have a home that can be used as security for the loan and satisfy other criteria, they will lend you the money to make the purchase.

This means you can rent the home out straight away and take advantage of the high demand for rented accommodation. In such situations, a closed bridging loan may be the best option, as it has a set repayment date. Once the repayment deadline arrives, you should be able to obtain a long-term mortgage to replace the loan.

Another condition high street lenders attach to their mortgages is that the property cannot have been unoccupied or require refurbishments.

Many newcomers to the buy-to-let sector purchase properties at auction with the view to renovating them and renting them out in the long-term.

As high street providers refuse to provide funds in such circumstances, a bridging loan may be your best port of call. You can borrow funds to cover the purchase price and the refurbishments that need carrying out.

Again, once the work is finished and the property is occupied, you can convert the loan into a long-term mortgage.

High street lenders will also demand that the rent covers 125 per cent of the interest payments. There is no way you can guarantee this, which is where bridging finance can help.

You can borrow the money and gradually build the rent up until it reaches this threshold. After six or 12 months, you can show the lender that you have achieved what is required of you and convert the loan to a conventional mortgage.

While bridging finance is an attractive option, it is important to note that interest rates are higher than those associated with traditional mortgage. In addition, the value of the home you use as security is judged on the market value and not the purchase price.

If you are confused about any area regarding bridging loans, you may want to speak to a financial adviser or a bridging loan company before proceeding.

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