Is now the perfect time to bridge-to-let.

There’s no shortage of forces pressuring the property market from different directions at the moment, which can make choosing an investment feel like a gamble.

But by keeping an eye on news and reports from across the industry, we’ve identified one investment that we think may be of interest: the bridge-to-let, in which you use a bridging loan to purchase a rental property, and then refinance with a buy-to-let mortgage later down the line.

So why bother with the bridging loan, and why not just purchase with a buy-to-let mortgage?

Stamp Duty holiday

The Stamp Duty holiday ends on March 31st, just eight weeks from now, and it’s far from clear if there’ll be any extension.

Assuming there won’t be, that’s typically too short a timescale to complete a purchase using a traditional mortgage; finding ways to shorten the process is vital. Firstly, you’ll want to avoid chains; and secondly, a bridging loan can often be granted much faster, helping you to complete before the deadline. Besides, a traditional mortgage may not even be an option; this is often true if the property is being bought at auction, because you typically have 28 days (at most) to complete your auction purchase.

Future changes to minimum energy efficiency standards

Currently, the legal minimum EPC rating for a rental property is E, and a mortgage lender may refuse your application for a buy-to-let mortgage if it doesn’t meet this standard. So a bridging loan gives you the means to secure the purchase before making improvements and then refinancing.

Furthermore, the Climate Change Committee is advising the Government on how to achieve its carbon reduction goals, and one current proposal is that all properties offered for sale and rent have a minimum EPC rating of C by 2028.

More than half of all properties in the UK currently fail to meet this standard, and – assuming the proposals are adopted – investors whose properties do meet the standard are likely to be at a competitive advantage.

Investing in upgrades while you have a sitting tenant can be both costly and disruptive, so the best time to do it may be immediately after purchase – especially if other major works are being undertaken at the same time.

Qualify for better mortgage offers

When refinancing onto your buy-to-let mortgage following the completion of works, the renovated property’s new value will be used in loan-to-value (LTV) calculations. Mortgages at lower LTVs typically attract the lowest interest rates, as they represent the least risk to lenders.

Let’s look at a simplified example, which doesn’t take into account your interest payments or any fees that will apply.

Of course, you could have simply bought a £140,000 property and put down a £50,000 deposit. But not only would you have borrowed more (£90,000), but you’ll have done so at a higher LTV (approximately 65%).

This means you’ll both owe more and be subject to a higher interest rate. That will push your monthly payments up, and may impact on what you charge in rent – which has knock-on effects for your tax liability, and your ability to attract a tenant.

Having said that, taking a bridging loan and then a mortgage could mean you have to pay more in fees, so you’ll need to weigh up whether any possible savings stand up to scrutiny.

In summary

With all of this taken into account, now looks like now may be a good time to invest in low-value property with a bridging loan, increase its value by refurbishment, and then look at the options available to you – whether you’re able to refinance with a buy-to-let mortgage, or decide to sell the property on if a buy-to-let mortgage isn’t available for any reason.