Buy to Let Bridging Loans – A Guide
By Helen Jackson -
As a landlord, many funding options are available to you when purchasing a property. This guide explores how you can use a bridging loan to purchase (and then mortgage) a buy-to-let property.
Continue reading to learn more about what you can and can’t do with a buy-to-let bridging loan.
Can I use a bridging loan to get a buy-to-let mortgage?
Yes, you can use a unique product called a bridge-to-let loan. Designed for the buy-to-let market, these loans are used to purchase properties which, at the time of purchase, aren’t in a suitable condition to rent out to tenants, therefore not eligible to be bought with a traditional buy-to-let mortgage.
In these situations, the buyer can take out a bridge-to-let loan to purchase the property and make the necessary modifications before the lender moves the loan over to a simple buy-to-let mortgage.
Do I need experience in the property market to get a B2L bridging loan?
Your required level of experience would almost entirely depend on the type of project you are looking to take, as the lender would generally make each decision on a case-by-case basis. For example, if you’re looking to purchase a property that simply needs a little maintenance, the decision to provide a bridge-to-let loan may be easy for the lender.
However, with properties where more substantial work, such as structural repairs or complete refits, needs to take place, the lender may want to see a track record of successfully working on similar projects. They may also require you to produce a strategic business plan outlining timescales and how and when you intend to pay the money back.
If this is your first venture using a bridge-to-let loan, it might be worth starting small and building your experience up, project by project.
What collateral or assets do I need as a deposit on a Bridge-to-Let loan?
Like with any loan, when applying for bridge-to-let finance, you’ll need to provide the lender with a deposit. Most lenders require at least a 30% deposit for this kind of loan, meaning they’d be willing to offer the remaining 70% of the money needed.
So, for example, if you required £200k to purchase a property, at the industry average of 30%, you’d be expected to contribute £60k, with the lender providing the remaining £140k.
However, in some circumstances, lenders will accept a deposit in the form of physical assets, such as cars, machinery, land, or anything else that the lender deems to be of equivalent value to the deposit required.
How much can I borrow with Bridge-to-Let finance?
How much you can borrow with bridge-to-let finance depends on a number of factors.
As we’ve mentioned above, the loan to value (LTV) ratio will generally be around 70%, meaning the average investment by a bridging loan provider will be 70% of the overall cost of the property, with the borrower providing 30% of the price themselves.
However, the LTV provided by the lender may be increased to closer to 80% if the borrower is looking to purchase a reasonably new or well-maintained property if the borrower is looking to pay the loan off over a shorter period.
We’d also recommend documenting your experience, deposit size and timeline in a detailed ‘exit strategy’, which you can present to your lender.
What do interest rates look like on Bridge-to-Let loans?
Interest rates for a typical bridge-to-let loan usually fall between 0.4-1% per month, with 0.85% being a good benchmark. However, like most loans, the rate can vary depending on your situation, initial investment, personal circumstances and experience.
If you’re willing to put a larger deposit down, this will most likely decrease the interest rate offered. The same goes for taking on a less risky project, showing that you have good credit or a positive track record of working on properties obtained through bridge-to-let.
It is also good to be aware that with a bridging loan, you can defer the interest due until the end of the loan term, paying off all the accrued interest in one go.
Do I need to factor VAT into Bridge-to-Let finance?
Like with all commercial purchases, VAT will be charged. So the same applies if you’re looking to buy a commercial property. If this is the case, you will need to factor VAT into your decision to purchase.
A bridging loan can give you a significant financial boost when purchasing a commercial property, allowing you to buy the property, provide relevant maintenance and pay off the VAT required.
It’s important to note that VAT only applies to a commercial property purchase, not residential. So if you are planning on using your bridge-to-let loan to become a residential landlord, you don’t need to factor VAT into your plans.
Can I use Bridge-to-Let finance for property repairs or upgrades?
Absolutely. This is what bridge-to-let finance is predominantly used for, along with the purchase of the property. Therefore, when requesting finance from a bridge-to-let loan provider, you’ll need to consider the overall project, including all modifications, to deliver a property acceptable for tenants.
So, the property might be selling for £100k, but it may require £20k worth of development to make it livable; therefore, £120k is needed to successfully obtain a buy-to-let mortgage on the property and begin renting it out.
This means the amount you’re asking the lender for will increase, as will the initial deposit you must provide. Borrowing more may also have an impact on the interest rates you’ll be paying as well.
These are all things to consider when choosing the type of project you want to take on.
What are the benefits of B2L bridging loans?
There are many positives to taking out a bridge-to-let loan, here are just a few:
- Working collaboratively with a bridge-to-let loan provider allows you to purchase a property that wouldn’t usually qualify for a buy-to-let mortgage.
- A bridge-to-let loan allows you to buy the property and will provide you with the additional capital to modify it before letting it out.
- You can purchase the property quickly and pay back the loan equally quickly, incurring minimal interest compared to a typical mortgage which would charge interest over a larger period.
What are the risks (and how can I avoid them)?
But with all financial decisions, it is essential to weigh up the good and the bad and make a considered decision. So keep these points in mind and plan accordingly:
- Like any loan, falling behind on payments is the biggest concern for most people. However, when it comes to bridging finance, the interest rates can be pretty high, making it a greater concern. The best way around this is to understand how you intend to make these repayments and outline this in your exit strategy.
- Commercial bridging finance is currently unregulated, meaning lenders can include their requirements in their terms and conditions, requirements which don’t necessarily have to align with the Financial Conduct Authority (FCA). This means it’s very important to ensure that you carefully read the terms and conditions of any contract to avoid tripping up and breaching these terms.
- Bridging loan rates are usually much higher than your average buy-to-let mortgage. However, suppose you want to lower the interest paid. In that case, you’ll need to consider paying a larger deposit, buying a low-maintenance property, or be sure to evidence your experience as a successful landlord, should you have any.
Perhaps you’re looking to purchase a property needing some TLC and don’t currently have access to the funds to make the purchase. If you’d like to learn more about how a bridge-to-let mortgage could work for you — take a look at our bridging loan directory and speak to some of our trusted lenders.