For landlords and property investors, price isn’t always the most important thing to consider when buying a property. Speed and flexibility are also key, which is why bridge-to-let finance can be a good option, especially if a traditional buy-to-let mortgage isn’t available right away.
What Does Bridge-to-Let Mean?
A bridge-to-let loan is a short-term financial solution that you take out if you want to buy or refinance a property, with the goal of switching to a buy-to-let mortgage once the property is ready. Bridge-to-let finance is usually used when you buy a property, but you can’t get a mortgage on it, or if you need to act quickly. They’re also commonly used if the property needs improving before it can be rented out, or if a buy-to-let lender won’t lend money until they’ve seen proof of how much income the property is likely to generate. In short, a bridging loan ‘bridges’ the gap between buying a property and getting long-term buy-to-let financing.
Bridge-to-Let vs. Standard Bridging Loans
Bridge-to-let financing uses a bridging loan, but there are big differences between how bridge-to-let and a standard bridging loan work. With bridge-to-let, the exit strategy is clear from the start, and the plan is always to refinance into a buy-to-let mortgage. Lenders and brokers will look at whether this exit is possible and realistic. But, with a standard bridging loan, there are more exit strategies to choose from. For example, selling the property or selling off other assets. A detailed comparison is covered in our article on bridge to let vs buy to let mortgage.
The length of the loan also differs, as bridge-to-let loans are usually 6 to 12 months in length, whereas standard bridging loans tend to have longer terms. This gives you time to renovate the property, rent it out and meet the requirements of buy-to-let lenders.
The Process of Refinancing with Bridge-to-Let
To use bridge-to-let successfully, you need to know how the refinance process works.
- Buy a Property with Bridging Finance – You can get a bridging loan to buy the property quickly. Depending on the lender’s terms, this could mean needing to do light or heavy repairs.
- Fixing Up and Renting Out – Once the work is done, and the property is ready to rent or get a mortgage on, you can start to prove the likely income the home will generate.
- Apply for a Buy-to-Let Mortgage – You can then apply for a buy-to-let mortgage once the property is ready, showing the lender how much rent you’re likely to bring in, the value of the property and your ability to repay what you’ve borrowed. The refinancing stage is critical, and understanding what happens after a bridging loan helps reduce delays and exit risk.
- Exit the Bridging Loan – The buy-to-let mortgage pays off the bridging loan in full. You then have long-term, low cost financing to continue your journey as a landlord or investor.
Why an Exit Strategy is So Important
The exit strategy is what makes or breaks any bridge-to-let deal. Before you get a bridging loan, be sure to have a clear plan in place for how you’re going to proceed, and how you plan to end the loan. You can then focus on the lenders who offer buy-to-let loans are likely to accept the property, and determine the highest loan-to-value (LTV) ratio available.
It’s important to remember that bridging loans are short-term loans with higher interest rates than buy-to-let mortgages. Costs can go up a lot if there are delays in repairs, renting or getting a mortgage. Having a realistic plan for how to leave helps to lower the risk, keep interest costs low and make sure the refinance goes smoothly.
For a successful bridge-to-let outcome, it’s important to work with a broker who understands both bridging finance and buy-to-let lending. Though bridge-to-let can seem confusing, when set up correctly, this time of financing can open up opportunities that traditional buy-to-let financing can’t.
