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What is a Bridge-to-Let Loan?

A bridge-to-let loan is a type of bridging finance that is designed specifically for landlords looking to purchase properties for rental.

The difference between a bridge-to-let and a standard bridging loan is that the exit strategy is built into the product in the form of a buy-to-let mortgage.

Bridge-to-let loans are ideal in situations where the property needs refurbishment before it would be deemed suitable security for a buy-to-let mortgage.

They are also suitable where speed is important, as they can be put in place much more quickly than a traditional buy-to-let mortgage, with the convenience of only working with one lender.

How does Bridge-to-Let Finance Work?

A bridge-to-let product comprises of two elements; a bridging loan and a buy-to-let mortgage.

Properties must be of a certain standard before they can be rented out and before you can take out a buy-to-let mortgage.

You can use a bridge-to-let loan to:

  • Carry out refurbishment work to make the property habitable, i.e. new kitchen and bathroom
  • Improve the energy efficiency of the property, i.e. a new boiler or double glazing
  • Purchase an HMO (House of multiple occupation) which may be seen has seen as higher risk by traditional mortgage lenders
  • To complete an investment auction purchase within the required timescale, by bridging first and then refinancing via a buy to let mortgage
  • To avoid issues within a property chain by enabling a faster completion than could be achieved with a standard buy to let mortgage.
  • To raise funds on an investment property that you already own, so that you can make improvements to the property, before re-letting it out for a higher rate of return.

The Bridging loan

The bridging loan is a short-term lending product which can be used to purchase a property and carry out refurbishment works. The property doesn’t have to be of any particular standard to obtain a bridging loan and you can borrow up to 75% of the purchase price or value.

Bridging finance is also ideal if you are purchasing the property at auction, which is where you will tend to find a lot of properties for sale that need renovations.

Most mortgage products can take a couple of months to complete, however bridging finance can be arranged much faster. When you purchase a property at auction you only have 28 days to complete the purchase

If you have another property that you can use as additional security, perhaps another buy-to-let or your home, then you may also be able to borrow the money needed to fund the renovations.

The Buy-to-let mortgage

The buy-to-let mortgage is designed for purchasing properties to be rented out. The amount you can borrow with a buy-to-let mortgage will be based on the rental income that the property will generate. Most lenders will be looking for a rental income between 20% to 30% over and above the monthly mortgage repayments.

Eligibility criteria for Bridge-to-Let loan

The amount that can be borrowed will depend on the lender’s maximum loan to value cap, as well as the rental income that the property will generate. Longer term loans may also be subject to a lower loan to value than a shorter-term loan.

Whilst most lenders will offer a maximum of 75% LTV, some may go as high as 85% LTV, but this will be reflected in the monthly interest rate.

Other assets, such as properties in your portfolio, can be used as additional security in order to reduce the overall loan to value.

Affordability for the bridging element of the loan will not be based on income, unless you plan to service the monthly interest payments rather than roll them up.  The bridge-to-let loan will be agreed on the basis of the affordability of the buy-to-let element.  Most lenders will expect the rental income to cover at least 125% of the mortgage repayments.

Not all lenders will require you to have previous experience as a landlord but for properties in need of more complex or extensive renovations, they may require evidence of previous successful projects.

How is the loan to value calculated for a bridge to let mortgage?

The loan to value is calculated separately for the bridge and the buy to let elements of the loan. For the bridging element the maximum loan to value will normally be 75% and this will depend on your experience, credit history and your plans for the property.

When looking at the LTV for the buy to let element, the lender will also take account of the likely rental income for the property and how this compares to the mortgage payments. Each lender will have different criteria in relation to the required rental income as a percentage of the loan payments.

What are the fees for a Bridge-to-let loan

In addition to the interest on the loan, lenders may charge other administrative costs, such as:

  • Arrangement Fee – this is charged by the lender and is usually between 1% to 2% of the loan amount. The fee will be added to the loan amount, so you won’t need to pay this up front.
  • Valuation Fee – this is the fee which is payable to a Chartered Surveyor to undertake a survey of the security property. The Surveyor will be chosen by the lender. If there have been significant works to the property prior to the switch to the buy to let mortgage, then the lender may require a second survey.
  • Legal Fees – You will be required to pay both your own legal fees and those of the lender when arranging a bridge to let mortgage.
  • Broker Fees – Whilst some brokers will charge you a fee for their services, at KIS Finance we don’t charge broker fees for arranging a bridge to let mortgage.

How long does it take to arrange a bridge to let mortgage?

A bridge to let mortgage may take slightly longer than a traditional bridging loan to arrange, as the underwriting process will include ensuring that the exit buy to let mortgage is guaranteed. However, in most cases the process can be completed in less than 4 weeks, making it much faster than a standard buy to let mortgage.

Advantages of a Bridge-to-Let loan

  • Guaranteed exit – Lenders will require an exit strategy before agreeing to a bridging loan.  The advantage of a bridge-to-let loan is that the exit is built in so you can move straight from the bridge to the mortgage with the same lender. 
  • Simplified process – Staying with the same lender will save on time by making the process much simpler when moving from the bridging loan to the buy-to-let mortgage.
  • Reduced costs – A bridge-to-let loan will save on the additional set up fees and legal costs associated with moving from a traditional bridging loan to a buy-to-let mortgage.