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Mortgages

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.

Did you know?

Some properties being sold at auction are those deemed ‘uninhabitable’ – by which we mean properties that have fallen into disrepair, are being sold mid-development, or have been damaged by weather or accident. A tribunal in 2019 decided that properties deemed unfit for use as a dwelling at their time of purchase should be treated at the non-residential Stamp Duty rate – meaning larger savings can be made. For example, a residential investment property bought before the deadline for £140,000 attracts a £4,200 Stamp Duty bill; after the Stamp Duty holiday ends, it will be £4,500; but an uninhabitable property of the same value has no bill to pay.

While this ruling does mean that there’s less pressure to complete before the Stamp Duty holiday ends, you’ll still likely to need to use a bridging loan rather than a mortgage to secure the purchase, as rules around the property’s state of repair tend to be more flexible.


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.

Example

Imagine you have £50,000 in the bank to invest.

You buy a property at £100,000 by putting down £30,000 as a deposit, and taking a £70,000 bridging loan for the balance; the loan has a 70% loan-to-value ratio.

You then spend your remaining £20,000 and three months completing renovations.

The property increases in value as a result of your renovations. It’s now worth £140,000.

You refinance your £70,000 bridging loan with a buy-to-let mortgage, but the property’s new value means you’re borrowing that same sum at 50% loan-to-value.


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.

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