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Buy to Let or Bridging: Which auction finance option is right for you?.

20 Mar 2024 | 7 min

Whether they’ve got a prosperous property portfolio or they’re dipping their toes into the rental market for the first time, landlords up and down the country are always on the lookout for bargains and opportunities to maximise their rental profits. And, with properties selling for 10% to 15% lower than through an estate agent, more landlords are finding those hidden gems at auction.

But, for the first-time auction buyer, the world of finance can seem confusing. It’s done at speed, and some buildings come with challenges that can prove a problem when it comes to getting funding. Worse still, most lenders aren’t set up to face these issues and requirements.

When should you use a bridging loan? Should you try and get a Buy to Let mortgage straight away? If you’re asking yourself these questions, this quick guide is for you. Here’s how to choose the best finance option for your auction purchase.

Bridging loan

What is it?

A bridging loan is a short term option (typically lasting up to a year). It’s designed to give you time between the initial purchase and securing longer-term finance. It also offers you the ability to repay the loan within a shorter time frame.

A bridging loan is generally quicker for lenders to provide and can be used in more situations than Buy to Let mortgages, including on properties that need extensive redevelopment or have a short freehold lease.

When should you use a bridging loan?

Bridging loans are still very much the finance option of choice when it comes to buying at auction. Whether it’s someone buying their own home, an investor looking to flip the property for profit, or a landlord looking to add to their rental portfolio, using a ‘bridge’ means that the buyer will have the funds required within the 28-day completion timeframe imposed on auction purchases.

They are useful when it comes to the speed at which funds can be made available, especially when time is winding down before you need to complete. A quick turnaround can help buyers that were on the verge of losing out on their property by ensuring that the funds are in place swiftly.

Typically, with bridging loans, you won’t need to repay on a monthly basis. Instead, you can repay the full amount and any interest that has accrued up to that point at any time during your term. Additionally, some lenders don’t have early repayment charges on bridging products. This is great if you can repay the full amount in three, six or nine months as you won’t end up paying as much interest or additional fees.

Let’s look at some scenarios where a bridging loan might be a better option than a Buy to Let mortgage:

  • Your existing lender has let you down and you’ve got days left before completion

Auction purchases have very defined completion dates – the date on which you need to have all your funding in place to complete the transaction and take ownership of the property. Typically, this time frame is 28 days, but you should always take into account weekends and bank holidays that will drastically reduce the amount of working days in that time. Many lenders simply don’t have the processes in place to turn an offer around this quick, with the average offer on a Buy to Let mortgage from a high street lender or bank taking between 4 to 6 weeks.

Unfortunately, we’ve seen many examples of customers being told by other lenders that they won’t have funding in place mere days before they are due to complete. In this scenario, it may not be possible for a new lender to provide a Buy to Let mortgage offer in time to meet the looming deadline. You will lose your property, including your 10% deposit, and could be liable to pay the vendor the difference between sale prices should they sell at auction again at a lower price.

In this case, a specialist lender like Together might still be able to provide a Buy to Let mortgage in time for the completion date, depending on the complexity of the case and the amount of time left before completion. If not, a bridging loan, which can be approved much quicker than a Buy to Let mortgage, can be provided to ensure the purchase is completed on time. You can then apply for a regular Buy to Let mortgage and, once it is in place, simply repay the bridging loan and any interest accrued.

  • You’ve bought a property that needs extensive renovation

The beauty of auction is that you can bid on a range of different property types and, typically, auction prices are lower than buying via an estate agent. It’s a great place for a landlord looking to grow their property portfolio to find a hidden gem or a bargain.

But, many of these properties are below market value for one simple reason – they need renovation. Unfortunately, this also means that the property wouldn’t currently qualify for a standard Buy to Let mortgage as it may have problems such as damp or structural issues that need to be addressed.

If you’re up for a renovation project, a bridging loan may be the perfect option for you. It will give you time to sort out issues, making the property habitable for your renters to move in, and also allowing you to apply for a longer term Buy to Let mortgage.

  • You’ve bought a property with a short freehold lease

Some properties bought at auction may be sold with a short freehold lease, and it could be difficult to get longer-term finance. For example, lenders won’t accept Buy to Let applications where the lease on the property is shorter than the mortgage term.

Using a bridge would give you enough time to extend the lease, using a section 42 notice, and then apply for a Buy to Let mortgage.

Scott Hendry, Director of Auction Finance at Together, explains, “Bridging loans are absolutely ideal for landlords that have snagged a deal at auction but the property needs some TLC before it can go on the rental market. We’re talking about situations where you need to sort out a major issue such as damp or bringing the property up to regulatory standards, not just ripping out the avocado-coloured bathroom for a shiny new one. Bridging loans give you flexibility and time.”

Scott went on to describe a case in which Together helped a landlord purchasing at auction for the first time.

“We recently helped out a landlord who had found a great property at auction – a two-bedroom flat that needed some renovation. She had just 15 working days to arrange finance and approached us to see what we could offer.”

We were able to provide a 12-month bridging loan so she could purchase the property before the auctioneer’s deadline. The customer has since asked us to help fund six more property purchases in just two months.”

What are the risks of a bridging loan?

As with any mortgage or loan, you need to ensure that you can pay back the money borrowed and the interest accrued in line with the terms set out by your lender. If you can’t repay the amount, any property that you have used as security could be repossessed.

As a bridging loan is a short term finance option, many lenders don’t require you to pay back interest on a monthly basis. Instead, the interest will accrue, allowing you to pay the loan amount and interest off in one go once your finances are in place.

However, if you cannot repay the full amount by the end of the agreed term, you will need to speak to your lender to arrange a different repayment plan. Missing the payment could also have a detrimental effect on your credit rating. Making sure you have your exit strategy in place will allow you to take full advantage of the bridging loan without any surprises at the end of the loan term.

 

Buy to Let

What is Buy to Let mortgage?

A Buy to Let mortgage is a long-term mortgage on a residential property that you’ve bought and want to rent out. You would not live at the property. It’s repaid monthly over a period of years as either an interest-only or capital repayment mortgage.

Renting out a property that you already have a standard residential mortgage on would mean that you’d be in breach of the terms associated with your existing mortgage. You’d need to switch to a Buy to Let before renting out the property.

When should you use Buy to Let mortgage?

Some lenders or brokers will tell you that getting a Buy to Let mortgage on an auction property is impossible due to the time it takes. That’s a myth! High street mortgage processes simply aren’t set up for the speed required to beat the 28-day completion date on auction purchases, but a specialist lender may be able to help.

Here’s where a Buy to Let mortgage makes more sense than applying for a bridging loan:

  • You’ve bought a quality, standard house at auction for around £200,000

Some high street lenders may also tell you that houses and flats bought at auction won’t qualify for a Buy to Let mortgage. Again, another myth, and a generalisation about the condition of auction properties.

If you’ve bought a standard property at auction, it might simply need a bit of modernisation or a lick of paint before your renters can move in. Your property is ready for a Buy to Let mortgage, but some lenders may force you into getting a bridging loan just to meet the completion day.

Scott explains, “The end goal for most landlords is to get on to a Buy to Let mortgage. It’s a loan that can be financed over a period of years by the rent they make, rather than coming out of their own pocket. We see so many properties at auction that are in the perfect condition to qualify for a Buy to Let, and yet landlords are being let down by lenders who say that they can’t turn around an offer in time.”

“Basically, the customer is forced to choose a bridging solution and has to unnecessarily pay extra because the lender is too slow. They will then need to pay all kinds of fees again when they switch to the Buy to Let they should’ve been on in the first place. That doesn’t seem very fair to me.”

What are the risks of Buy to Let?

Buy to Let mortgages may take longer than bridging loans to process and approve, although this isn’t always the case with a specialist lender. If you’re an auction buyer, ensure you work with a lender that has the knowledge and experience to provide a Buy to Let mortgage at speed, within the required completion timescales.

As with bridging loans, failing to repay your mortgage consistently and in full could lead to your property, and any other property used as security, being repossessed. With a Buy to Let mortgage, you’ll pay an amount back to your lender every month, which could change due to interest rates and the type of mortgage you buy.

Buy to Let mortgage repayments are usually met using the rental made on the property. If your property is empty for a long time (over 60 days) or you have a tenant that won’t pay, you’ll need to have another income stream available to make payments, or use insurance such as Rent Guarantee insurance or Unoccupied Landlord insurance.

 

At Together, we’ve opened the doors to thousands of auction buyers over the last 20 years, helping them to achieve their property ambitions by being flexible when it comes to property types, income and employment, and credit history.

Funding can be pre-approved in minutes, at no upfront cost. We would conduct a free desktop valuation / automated valuation and soft credit search, aiding your confidence to bid.

Ready to explore auction finance from Together? Find out more and get a decision in principle today.

Any property used as security, including your home, may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.

Articles on our website are designed to be useful for our customers, and potential customers. A variety of different topics are covered, touching on legal, taxation, financial, and practical issues. However, we offer no warranty or assurance that the content is accurate in all respects, and you should not therefore act in reliance on any of the information presented here. We would always recommend that you consult with qualified professionals with specific knowledge of your circumstances before proceeding (for example: a solicitor, surveyor or accountant, as the case may be).

Lending decisions are subject to an affordability/creditworthiness assessment.

All content factually correct at the time of publishing.

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