The broker’s guide to bridging for buy-to-let

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bridging for buy-to-let

Why short-term funding is a smart option for many buy-to-let landlords, says Steve Smith, national sales manager at Roma Finance.

Most brokers have some experience of the buy-to-let sector, and there’s a wide choice of lenders catering for landlords.

They range from high street banks serving the core buy-to-let market to specialists focusing on professional landlords and more complex sub-sectors, such as HMOs.

But, despite the diverse range of funding solutions on offer, some investors still find themselves excluded from the traditional landlord mortgage market. And they’re increasingly turning to bridging finance to help them achieve their property goals.

Buy-to-let overview

The Private Rented Sector accounts for a fifth of all UK households and the fundamental drivers supporting the market remain strong.

The UK has a growing population, insufficient housing supply and soaring house prices. All of these make access to homeownership difficult, particularly for younger adults, which drives demand for rented properties.

It’s why, despite a raft of new rules and tax changes for landlords over the last 10 years, investing in property remains profitable and popular. There may be more red tape in the sector but there are also low voids, strong demand, high rents and steady capital growth.

Tougher mortgage rules

However, lending rules introduced in 2017 by the Prudential Regulation Authority have made it harder for some landlords to get the numbers to stack up on buy-to-let mortgages.

Guidelines on interest coverage ratios and stress testing particularly affect those buying in high value areas, such as London and the South East, as well as highly geared landlords. Top-slicing can help some of these landlords if they have other sources of income, but there are other issues.

Processing in the buy-to-let mortgage sector often moves too slowly for landlords or investors to quickly grab a purchase opportunity. Whether they are buying at auction or just have tight timescales, a standard buy-to-let mortgage process might simply be too slow. This was exacerbated by portfolio lending rules and, in the last year, by the pressures of the pandemic.

Finally, some landlords want to buy a unmortgageable property or one that requires some refurbishment – a house without a kitchen for example. Standard buy-to-let mortgage lenders won’t lend on these non-standard properties which can make it difficult for property investors to maximise buying opportunities.

Which is where bridging lenders can help.

Benefits of bridging for landlords

Bridging finance is a popular solution for landlords who can’t access buy-to-let mortgages or who need a faster funding option.

It allows your customers to take advantage of market opportunities, ensuring they don’t miss out because of difficulties or delays arranging mortgage finance.

Benefits of bridging for landlords include:

Speed – Fast offers and processing can enable your customers to take advantage of buying opportunities they would otherwise miss, for example buying at auction or time-sensitive purchases. Bridging lenders can release funds in days, not weeks, significantly speeding up the purchase process.

Flexibility –  Bridging lenders underwrite on an individual basis and take into account the bigger picture of your customer’s finances and the property project. They won’t automatically discount applicants with credit blips, the self-employed or those with large background portfolios.

Bespoke solutions – If there’s building work to be done on the property before it can be rented out, the lender can create a bespoke funding package, paid in instalments if needed, to fund the work while reducing the interest incurred.

More accessible – Bridging lenders will usually consider a diverse range of property types as well as unmortgageable properties if your landlord customer is planning to refurbish a property before letting.

Exiting a bridging loan

Bridging loans are usually six to 24 months long, at the end of which your customer needs to repay the loan, plus interest.

This is usually done by either selling the property, paying off the loan with other means or refinancing to a longer term mortgage – in the case of landlords, a buy-to-let mortgage.

Assuming the property is in a lettable state and their expected rental income is sufficient for the lender, you will be able to help them to secure a mortgage and redeem their bridging loan as planned.

Another option is a bridge-to-term product, offered by some bridging lenders, which could give your customers a more secure exit strategy.

Bridge-to-term loans

Bridge-to-term or bridge-to-let products are products that effectively combine a bridging loan with a buy-to-let mortgage.

Instead of having to find a new lender to remortgage to at the end of the bridging loan term, the landlord automatically moves onto a longer-term product with the same bridging lender. Their bridging loan effectively turns into a mortgage.

It means they go into their short-term finance knowing they have a secure exit plan for the bridging loan. Down the line they can still switch away to a standard buy-to-let mortgage when the property is ready.

Bridge-to-term gives your landlord a guaranteed exit strategy from the bridging loan, taking the time pressure off if refurbishment of the property is delayed for example.

Roma Finance offers a fully flexible solution with a five-year fixed rate buy-to-let mortgage that landlords can combine with a bridging loan to create a bespoke lending package.

For example, the customer could use the bridge-to-term option to buy land and develop it, and then move onto the five-year fixed rate product. Or they might take a bridging loan to fund an auction finance purchase, then go on to refurbish the property before moving onto the five-year buy-to-let mortgage.

The mortgage element can be approved at the same time as the initial bridging loan, so the customer has a secure long-term strategy. And at the end of the five-year fixed rate they are free to remortgage into the mainstream buy-to let market.

How to choose a provider

There are plenty of bridging lenders offering short-term loans to landlords, and a handful that also offer bridge-to-term products. Choosing which is best for your customers is more difficult.

If you aren’t confident in your knowledge of the market and the products on offer, remember you can go direct to a lender or via a specialist distributor (packager).

If you prefer to go direct, talk to other brokers to see which lenders are offering consistently reliable service and, if you haven’t dealt with a lender, pick up the phone. They should be happy to talk you through their products and processes.

The buy-to-let mortgage sector is competitive and thriving, but it doesn’t meet the needs of all landlords.

Don’t forget to consider how a bridging loan could support your landlord customers and do your research on the lenders that can help.