Bridge-To-Let

A bridge-to-let type of scenario is especially useful when the property needs rebuilding or refurbishment and thus would not usually be acceptable for a conventional buy to let mortgage.

Once the property is ready and in a lettable condition, you can remortgage back to a conventional buy-to-let mortgage by repaying the outstanding amount on the bridging loan. So, what are the risks and eligibility criteria for such a scenario? 

Read on to find out about bridging finance solutions.

What Is A Bridge-To-Let Scenario?

You can use a bridge-to-let /scenario on commercial and residential properties with a suitable exit plan for this article, this being a buy-to-let remortgage. 

After the work has been completed to bring the property to a lettable condition through the bridging loan, it’s possible to rent out the property and then refinance onto a regular buy-to-let mortgage, which will act as the exit plan for the bridge. 

Note that the monthly rental income must meet the rental affordability required by the buy to let lender to grant a loan amount that is enough to clear the bridging finance initially taken. 

Why Do You Need A Bridge-To-Let Scenario? 

When considering the purchase of some type of property, bridging finance can be useful for a quick resolution, which is essential considering the UK’s competitive housing market. 

In certain spaces, the speed of the application process often determines whether you get the property. 

Moreover, some properties require additional work to turn into a proper living space, or you may have got the house at an auction.

In such instances, you can use a bridge-to-let scenario to purchase the property through a bridging loan and then refinance onto a buy-to-let mortgage later down the line. You can’t use a traditional buy-to-let mortgage but will need a bridge-to-let to make the purchase. 

After making the required modifications, a new lender or if the case meets the bridging lenders BTL remortgage criteria, they should allow you to shift the loan to a normal buy-to-let mortgage. 

Converting To A Buy-To-Let Mortgage? 

As mentioned earlier, you must have an exit strategy to take out a bridging loan. In other words, you must explain how to repay the loan as part of the application process as the key piece of criteria.

As earlier outlined, for a person buying a property that they want to rent out, a suitable exit strategy would be remortgaging it to a buy-to-let mortgage.

We recommend contacting a specialist broker who will have the experience to hold your hand throughout the process to give you the best opportunity to refinance to a buy-to-let mortgage once the bridging loan has been taken out initially to complete the required works to turn the property into a lettable condition. 

Can You Convert To A Buy-To-Let Mortgage Within 6 Months?

In most cases, lenders are reluctant to refinance properties (through a buy-to-let mortgage) that have been purchased within 6 months due to certain concerns on how the property was purchased in the first place. That said, you will find several specialist lenders who are willing to take this risk. 

However, in most cases, you must provide evidence of how you got the money for the original purchase. This is where a bridging loan proves effective, as showing the source of the money isn’t difficult. 

Why Do Landlords Take Bridging Loans That Are Later Converted? 

New landlords prioritise 2 things when making a rental investment – capital appreciation and rental yield. 

In other words, you will want to generate income from the property and ensure that it increases in value when the time comes for selling. That’s why bridging loans are much sought-after, as they allow a time period to add value initially and make the property lettable. 

Then, most people’s long-term plan for financing the property will be through a buy-to-let mortgage, where they can achieve a steady stream of longer-term rental income, a longer mortgage term and, in most cases, a reduced amount of interest. This re-mortgage repays the bridging loan initially taken. 

Bridge-to-let allows you to act quickly, and you can later remortgage into a buy-to-let loan. You can opt for a bridge-to-let mortgage during – 

• Auctions 
• Distressed sales 
• Essential property improvements 
• Lease extensions 

Benefits Of A Bridge-To-Let

Here are some benefits of using a bridge-to-let. 

1. Pre-Fixed Exit Finance

It’s essential to have a suitable exit plan in place before you get approved for the loan & property. 

2. Faster Underwriting & Legal Completion 

Underwriting and completing the application process is quicker. In some instances, we have seen that the bridging finance has been completed in days. 

You can also opt for a bridging loan to buy another property before another property you have has been sold. This allows you to avoid the problem of being stuck in a chain like many others. 

We also suggest speaking to specialists throughout the process as it is a complex transaction.

Do You Have To Be Experienced As A Landlord? 

You don’t necessarily need to be experienced as a landlord to get approved for a bridge-to-let. However, many lenders will desire landlord experience as it is a complex scenario you are looking to complete. 

This is especially true if you are undertaking a large project that involves considerable renovation, which increases the chances of things going wrong. 

In such cases, a lender might ask for a detailed plan of the project and a history of successful properties you have worked on.

Lenders have in-depth knowledge of the complexities of the housing market and how labour-intensive renovations are likely to be. That’s why they avoid potentially risky projects to avoid a loss. 

If you are dipping your toes into bridge-to-let, starting with an easy project and building your portfolio before undertaking large-scale renovations would normally be advisable. 

How Much Can You Borrow From A Bridging Loan / What Are the Costs?

Several factors determine the loan amount you can borrow from a bridging loan. But note that these conditions differ from regular residential mortgages, buy-to-let mortgage agreements and will vary from lender to lender. 

We have seen that the “bridge” part of the loan is not calculated with the later “to-let” portion; these factors are determined separately. 

With a bridging loan you can add the interest to the loan when it’s taken out to avoid monthly payments completely. 

In such a scenario, where you add the interest to the loan, there is no need to provide evidence of repayments, provided you have a suitable exit strategy as this is what will be assessed as being used in order to repay the bridging loan and accumulated interest. 

But if you opt for monthly interest payments, the lenders may assess ongoing monthly affordability of the transaction more closely to accept the application. 

Can You Get A Bridge-To-Let Mortgage With Bad Credit?

In most cases, you will need a good credit score to get the desired mortgage, but some specialist lenders accept applications with bad credit. Some of the reasons for bad credit include:

• Bankruptcy 
• County Court Judgements 
• Hard searches of the credit file 
• Credit file defaults 
• Repossessions

Individuals new to finance who haven’t built up their credit history can also be termed bad credit due to a reduced credit score. 

To choose lenders in such situations, you must opt for those with the right eligibility criteria, as lenders have varying requirements. 

What Is the Exit Strategy for a Bridging Loan and What Implications if the Bridging Loan Is Not Repaid Within the Required Term?

A suitable exit strategy is used to underwrite that the loan will be repaid within the allotted time. Bridging loans are considered a short-term option and usually more expensive, however as detailed above you can get the funds quickly should you need them. . 

However, there may be times when the exit strategy doesn’t work, and the account is placed in default. 

You can opt for one of the following methods for a quick resolution – 

• Ask the lender to extend the loan term
• Choose a new lender for refinancing 

If none of these work, the lender is obligated to repossess the property, thereby damaging your credit file and future financial prospects. 

What Is The Cost Of A Bridging Loan? 

Bridging loans have setup fees and a level of interest that you must pay during the loan term. Alongside this, other fees may include:

• Property’s valuation fee 
• An exit fee 
• Arrangement / Facility fee, comprising 2% of the loan 
• Legal costs
• Broker free where applicable 

The lender will do their best to detail the fees within a key features illustration to help you decide whether the loan is affordable and ultimately the right thing for you. 

What Deposit Do I Need for a Bridging Loan?

As with any loan you will need to deposit a certain amount of the property’s value to qualify for the bridging loan. In most instances, lenders will ask for a 30% deposit minimum and offer the remaining 70% of the money needed. 

What Are The Interest Rates On A Bridging Loan?

The interest rates for a bridging loan typically range between 0.4% and 1% monthly. However, the rate of interest can vary based on lenders’ requirements, initial investment, situation, experience, and personal circumstances. 

People who pay a larger deposit upfront will have to pay lower interest rates usually compared to others. 

Moreover, if the risk involved with the project is less, you have a positive track record, and good credit, the interest rates tend to be lower. 

Some people choose to defer the interest payments to the end of the loan term, paying the amount in one go. 

FAQs 

1. What are the factors to consider to apply for a bridge-to-let? 

Some factors to consider for a bridge-to-let mortgage include credit history, personal details,, past experience, exit strategies for refinancing or selling the property, other assets, affordability, etc. 

2. What are the risks of bridge financing? 

The biggest risk of bridging financing will be the effectiveness of the exit strategy to repay the bridging loan within the allotted term. 

3. How much deposit do you need for a bridging loan? 

In most cases you will require a 30% deposit minimum to secure a bridging loan that can later be refinanced with a buy to let mortgage , but the amount can vary depending on lenders’ specific requirements.

**A buy to let mortgage will be secured against your property.

Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.