What is a bridge-to-let?

Bridge-to-let is a clever product that combines a bridging loan and a rental mortgage. It allows real estate investors to buy a rental property that they might find difficult to finance with a term mortgage, make all the necessary improvements to increase the value without making any payments, then move to a pre term mortgage. -approved once the property is ready to be let out and generate rental income.

With bridge-to-let, both funding facilities can be approved with a single application process at the start of the transaction, meaning there is no duplication of work, additional costs or delays. and that exit from the bridge is guaranteed.

Common uses of bridge-to-let

Light renovation

One way for property investors to maximize their rental returns is to buy a property that needs work to make it fit for purpose, do the work, and then rent the property.

Light renovation is the term used for a renovation of a property which does not require any planning permission or building regulations and where there is no change in use of the property, and generally includes renovations such as a new bathroom bath, a new kitchen, redecoration, rewiring or new windows generally under permitted development rules.

A light renovation of a property is a good way to add both capital and rental value to the property without having to undergo major structural changes. After all, a new kitchen and bathroom and some decorative work can transform an otherwise undesirable property and help the property earn a premium in the rental market.

Some bridge lenders may also take into account the increase in value resulting from any renovations when agreeing the terms of the buy-to-let mortgage.

Conversion to HMO

HMOs are a popular way for owners to increase their ongoing rental income and so one way for a real estate investor to increase their returns is to buy a property and do the work to convert it into an HMO.

An HMO is a building that is not comprised entirely of self-contained apartments and where occupants share one or more of the basic amenities (defined as restrooms, personal washing facilities, and cooking facilities). A typical HMO might be a student house rented to a number of different students, but HMOs are also popular near city centers among young professionals and near hospitals for medical and maintenance staff. An important consideration for landlords buying an HMO investment is to think about the location of the property and the possibility of renting it out as an HMO, as some areas will be unsuitable for this type of investment, and there are clearly questions regarding the student application. housing for the foreseeable future.

It should also be remembered that there is now a compulsory license for all HMOs occupied by five or more people from two or more households. And, as part of this compulsory license, there are minimum room sizes for rooms in licensed HMOs.

Investors who buy a property with the intention of renting it out as an HMO will usually need to carry out work to make the property fit for purpose, and that’s where the bridge loan can come in. The loan – initial relay can be used to buy the property and carry out the work, before transforming it into a rental mortgage when the work is finished and the building is ready to receive 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 get the best price.

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

Then, when properties are ready for tenants, the bridge to leasing can transition to longer-term financing. This approach is particularly useful for developers who are ending their programs during a downturn in the buying market when they might not get as much from the sale of a property as they would have hoped. Similarly, in a rising market, bridging leasing can allow developers to hold on to a property and benefit from price increases before choosing the best time to sell the asset. By letting properties, rather than selling as soon as they are ready, developers have better control over when they choose to sell, so they can weather any downturn or make the most of any upturn and plan their recovery strategy. release at a time when they are most likely to get the best price.

What are the benefits?

There is no doubt that the transition can offer great freedom to real estate investors. 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 because taking out a bridging loan depends on the validity of the exit route. Investors can often have concerns about their ability to refinance a bridge loan onto a rental mortgage within six to 12 months and if they are unable to refinance a bridge loan in time, they may be exposed to high default rates. interest.

Bridge-to-let removes this uncertainty because the exit route is underwritten and pre-approved in advance, so it can offer investors more peace of mind than separately researching a bridge loan and then a mortgage to buy. -rental. This makes it more suitable for less experienced investors embarking on one of their first renovation projects and can also prove invaluable in helping experienced portfolio owners plan with more certainty.

In addition to peace of mind, bridge-to-let can bring great efficiency to the process of financing a real estate investment. Since short-term and long-term funding is secured upfront, there is no need to go through the full application again. For brokers, this means no duplication of your work or additional and potentially costly delays for your clients, which is especially welcome at times like these.

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

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To recap, this article helped you…

The learning objectives of this article are:

• Understand some of the risks real estate investors take when they take out bridge financing.
• Identify how a bridge mortgage can help mitigate these risks.
• Recognize typical uses of bridge financing where a bridge mortgage may benefit the client.

CPD