Reducing client risk using bridge-to-let

The learning objectives for this article are to:

What is bridge-to-let?

Bridge-to-let is a clever product that combines a bridging loan and a buy-to-let mortgage. It enables property investors to purchase a rental property that they might struggle to finance with a term mortgage, complete any necessary improvements to increase the value without making any payments and then switch onto a pre-approved buy-to-let term mortgage once the property is ready to be let out and generate rental income.

With bridge-to-let the two funding facilities can be approved with one application process at the start of the transaction, which means no doubling up of work, no extra costs or delays and guaranteeing the exit from the bridge.

Popular uses for bridge-to-let

Light refurbishment

One way for property investors to maximise their buy-to-let returns is by purchasing a property that requires some work in order to make it fit for purpose, carrying out the work, and then letting the property.

Light refurbishment is the term used for a property renovation that requires no planning permission or building regulations and where there is no change of use to the property, and commonly includes renovations like a new bathroom, new kitchen, redecoration, rewiring or new windows usually under the permitted development rules.

A light refurbishment of a property is a good way of adding both capital and rental value to the property without having to undergo significant structural changes. After all, a new kitchen and bathroom and some decorative work can transform an otherwise undesirable property and help the property to command a premium on the rental market.

Some bridge-to-let lenders can also factor in the value uplift resulting from any renovations when it comes to agreeing the terms of the buy-to-let mortgage.

Conversion to HMO

HMOs are a popular way for landlords to increase their ongoing rental income and so one way for a property investor to increase their returns is to buy a property and carry out work to convert it to an HMO.

An HMO is a building that is not entirely comprised of self-contained flats and where the occupants share one or more of the basic amenities (defined as a toilet, personal washing facilities and cooking facilities). A typical HMO might be a student house that is let to a number of different students, but HMOs are also popular close to city centres amongst young professionals and near to hospitals for medical and maintenance staff. An important consideration for landlords purchasing an HMO investment is think about the location of the property and the potential to let it as an HMO, as some areas will be inappropriate for this type of investment, and there are clearly some questions around the demand for student accommodation for the foreseeable future.

It is also worth remembering that there is now mandatory licensing for all HMOs that are occupied by five or more people from two or more households. And, as part of this mandatory licencing, there are minimum room sizes for bedrooms in licenced HMOs.

Investors buying a property with the intention of letting it as an HMO will usually need to carry out some work to make the property fit for purpose, and this is where the bridge-to-let loan can come in. The initial bridging loan can be used to purchase the property and carry out the work, before switching it to a buy-to-let mortgage when the work has been completed and the building is ready for tenants.

Development exit loans

Bridge-to-let can also be used as a development exit loan, putting developers in a position where they have greater control over when they choose to sell in order to achieve the best price.

The bridging element of bridge-to-let can be used as a development exit loan to refinance a scheme that is completed or nearing completion, often at a lower rate than the development finance facility and can also free up capital that a developer can use to start their next project.

Then, when the properties are ready for tenants, bridge-to-let can switch over to longer-term funding. This approach is particularly useful for developers who complete their schemes during a downturn in the purchase market when they might not achieve as much from the sale of a property as they would have hoped. Similarly, in a rising market bridge-to-let can enable developers to hold onto a property and benefit from price increases before choosing the best time to sell the asset. By letting out the properties, rather than selling as soon as they are ready, developers have greater control over when they choose to sell, so can ride out any downturn or make the most of any upturn and plan their exit strategy at a time when they are most likely to achieve the best price.

What are the benefits?

There’s little doubt that bridging can provide property investors with a lot of freedom. It can be fast and flexible, and deployed where it may be difficult, or impossible, to secure a standard term mortgage. But it can also be uncertain as the underwriting of a bridging loan is dependent on the validity of the exit route. Investors can often have concerns about their ability to refinance a bridging loan onto a buy-to-let mortgage in six to 12 months’ time and if they are unable to refinance a bridging loan in time, they may be liable to high rates of default interest.

Bridge-to-let removes this uncertainty as the exit route is underwritten and pre-approved upfront, so it can provide investors with more peace of mind than separately sourcing a bridging loan and then a buy-to-let mortgage. This makes it more suitable for less experienced investors who are embarking on one of their first refurbishment projects and can also prove invaluable in helping experienced portfolio landlords to plan with more certainty.

In addition to peace of mind, bridge-to-let can deliver a great deal of efficiency to the process of financing a property investment. As both the short-term and longer-term funding are secured at the outset, there is no need to go through the full application again. For brokers, this means there is no doubling up of your work or additional and potentially costly delays for your clients, which is particularly welcome at times like this.

At any time, bridge-to-let is a straightforward process that can provide investors with more flexibility and greater peace of mind. It can also be more efficient, with one application process rather than two, putting investors in a stronger position to make the most of any opportunities that the market presents.