As a property investor in the UK, choosing the right funding structure can mean the difference between getting a great deal and missing out completely. When you’re buying or refinancing a rental property, you have two common options to choose from – bridge-to-let finance and traditional buy-to-let mortgages. Even though both support long-term rental strategies, they do so in very different ways.
The Differences Between Buy-to-Let and Bridge-to-Let
A bridge-to-let loan is a short-term loan that’s aimed at property investors who want to refinance into a buy-to-let mortgage once certain conditions are met. People tend to use the bridge-to-let approach when a property isn’t ready for a regular mortgage. For example, if it needs repairs, doesn’t have any tenants or is bought at auction. A buy-to-let mortgage is different, as it’s a long-term loan that you can use to buy or refinance a rental property that’s ready to rent out. Most of the time, these loans are paid back over 25 to 35 years, and they’re usually based on the likely rental income. This approach is explained in more detail in our guide on bridge to let explained.
Who Can Get a Bridge-to-Let Loan?
Bridge-to-let lenders pay attention to:
- The possible value of the property
- Your plan for getting out, such as refinancing to a buy-to-let mortgage
- Your experience as an investor
You don’t usually need rental income at first, and the credit requirements can be less strict than with regular lenders.
Who Can Get a Buy-to-Let Mortgage?
Buy-to-let mortgages have stricter rules and usually need:
- A property that is already livable and can be rented out
- A minimum rental coverage ratio, which is usually between 125% and 145% of mortgage payments
- A good credit history
If you don’t meet these requirements, your buy-to-let mortgage application will probably be denied.
Comparing Speed and Flexibility
Bridge-to-let loans are designed to be quick. You can often get funds in a matter of days or weeks, which makes them perfect for:
- Buying at an auction
- Deals that are time-sensitive
- Stopping a property chain from falling apart
Terms are flexible and usually last between 6 and 18 months, which gives you time to carry out their plans. However, buy-to-let mortgages aren’t quite as speedy. Depending on price, underwriting and rental evaluations, buy-to-let mortgages can take 8 to 12 weeks or longer. This is why they don’t tend to work as well when speed is important.
Property Condition Issues? Bridge-to-Let Might Be Best
A bridge-to-let loan is great for properties that:
- Can’t be mortgaged
- Need repairs to the structure or the way it looks
- Don’t have kitchens, bathrooms or utilities
- Are empty or not livable
Bridge-to-let funding is a common way for investors to buy a property, fix it up and then refinance it once it meets mortgage standards.
Comparing Risks: Bridge-to-Let and Buy-to-Let
If not planned properly, bridge-to-let financing is riskier. This is because interest rates tend to be higher than those on buy-to-let mortgages and, because it’s a short-term loan, an exit strategy is very important. There’s also the risk of costs going up if you struggle to pull off the repairs and refinancing needed. Fortunately, you can lower these risks by setting realistic deadlines, getting professional advice and making a clear plan for refinancing. You may want to read our article about remortaging after a bridging loan.
Buy-to-let mortgages are usually less risky because you have longer to pay the loan back, interest rates are usually lower, and rental income is stable and easy to predict. However, the risk comes with how slow buy-to-let mortgages can be. It’s not uncommon for investors to lose deals because they can’t act fast enough, or because the property doesn’t meet lending standards.
This is why a lot of experienced investors use both types of loans, starting with a bridging loan and then switching to a buy-to-let mortgage once the property is ready.
