How bridging loans can help buy-to-let investors

Friday, 30 March 2012 03:49

Bridging finance is one of your options

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.
 

 

Comments

Finance articles

  • Is a bridging loan right for budding entrepreneurs?

    Raising the money you need to start a business can be hard, however, there are alternatives to bank loans. Among them are bridging loans, peer-to-peer lending and borrowing money from friends and family, meaning you need to do plenty of research.

  • Important questions to ask bridging loan companies

    Before taking out a bridging loan, you must understand a number of key points. These include the rate of interest you will be charged, the length of time you have to repay the loan and whether there are any arrangement fees that apply.

  • Why bridging loans are only suitable for short-term funding

    You should only consider bridging finance if your funding needs are temporary. This is because the high rates of interest make bridging finance unsuitable as a long-term solution, so if you have long-term needs, you should look at other options.

  • Banks vs. specialist lenders – which bridging loans are best?

    Both banks and specialist bridging loan companies can provide the bridging finance you need, meaning you need to compare products from a range of providers. You need to look at factors such as interest rates and arrangement fees.

  • Can bridging loans work for those who only need small amounts?

    Some bridging loan companies will lend up to £5 million if you have sufficient equity in your home, however, what if your borrowing needs are more modest? If you need a sum of £10,000, bridging loans can still be an option.

View More Articles

Related stories

A parents guide to student finance

It is possible to lessen the debt a student has on graduation

Students face a daunting financial legacy at the end of their studies. Find out how you can help as a parent.

How will personal finance trends affect your finances in 2013?

What does 2012 hold in store for your finances?

Myfinances.co.uk presents the second part of our in-depth analysis of how your finances will be affected in 2013 focusing on the likely trends in personal finance in 2013.

New Year mortgage sale tempts all types of borrowers

2013 has given optimism for first-time buyers so far

The first ten days of 2013 have brought about a plethora of mortgage rate cuts and reduced fees for all types of borrowers from first-time buyers to homeowners with lost of equity.

Why equity release is a better way to borrow than personal loans

Equity release may be a better way to borrow

If you want an effective way to borrow, there are several ways you can do this. While personal loans are one option, when you think about the advantages on hand with an equity release plan it may be the latter you are most inclined to take out.

Why equity release is a better way to borrow than personal loans

Equity release may be a better way to borrow

If you want an effective way to borrow, there are several ways you can do this. While personal loans are one option, when you think about the advantages on hand with an equity release plan it may be the latter you are most inclined to take out.

Why an equity release plan is a better way to raise finance than personal loans

Equity release may be a better way to borrow

If you're looking for an effective way of raising finance, you'll find there are a number of ways that you can do this. And while personal loans can be one possible option, when you think about the advantages that are on hand with an equity release plan it may be the latter product you are most inclined to want to take out.

The cheapest ways to pay off Christmas debt

Make sure the only way is up for your finances in 2013

If you are dreading your next credit card bill after living it up over Christmas then take control of your finances and find the cheapest method to pay off your debts.

Bank of England says credit will be easier to obtain in 2013

Bank of England data shows another rise in mortgage approvals

The latest Bank of England lending data shows that mortgage approvals have risen for the 5th consecutive month in a sign that the Funding for Lending Scheme is having a positive impact.

Newsletter sign up

Interests

In addition to the weekly newsletter, which areas of finance would you like to hear from us about:

Tick this box if you would like us to send you promotions from carefully selected third parties.

By signing-up you agree to the terms of use and privacy policy.

sign-up button

Get the latest information on: