It’s been a time of big change in the mortgage market. The ill-fated mini-Budget is still only a matter of weeks ago, and yet its impacts continue to be felt by anyone looking for a mortgage.
Lenders of all kinds, active in every area of the market, moved quickly to withdraw their product ranges and reprice them at a higher rate.
Meeting ICR requirements
One of the big challenges that investors have faced since this market upheaval has centred on rental calculations.
When a mortgage lender assesses an application, a key factor is the interest cover ratio (ICR) – how the size of the rental income compares to the interest payments on the buy-to-let mortgage.
With many lenders requiring a minimum ICR of 145%, the recent increases to interest rates have made it far tougher for landlords to meet that ratio without also hiking the rents charged on the property.
That might not be an option, however. If you’re buying or refinancing a property that already has a high-quality tenant in place, you might not want to risk losing them by increasing the rents substantially.
Similarly, increasing rents by such a degree could make the property less attractive compared to rival properties in the area.
Crossing the bridge
There is an alternative option open to investors, in the form of a bridging loan.
Bridging loans are short-term property loans and are often popular with investors for a host of reasons.
First and foremost, the process of obtaining a bridging loan is much faster than a regular buy-to-let mortgage – in some cases lenders can deliver the funds within just a matter of days, rather than the weeks taken to provide a buy-to-let mortgage.
That can help investors secure a deal when time is of the essence.
Bridging loans are often utilised when some work is needed in order to get the property up to standard.
The funds are used not only to complete the transaction but also to carry out the work, raising the value of the property in the process. The investor can then refinance to a regular buy-to-let deal, paying off the bridging loan in the process.
Adding to the appeal of bridging loans is the fact that prices have not accelerated at the same rate as buy-to-let products recently, while the level of competition between bridging lenders means that applicants are unlikely to be short of potential options.
Why bridging loans can help with the ICR conundrum
Bridging loans can be a useful way around the ICR issues because they can provide investors with some breathing space in which to make more long-term decisions.
In recent weeks we have seen the interest rates on buy-to-let mortgages start to stabilise, with some within the industry suggesting that lenders may have been a little overcautious with their repricing following the mini-Budget. If they are correct, then lenders will drop their rates further in 2023.
This is where bridging loans can play such a useful role. Investors with a good eye for a quality property can use the bridging loan today to secure the property, and get it up to the standard they expect from their portfolio.
They then have 12 to 18 months to work out their next step. If rates do indeed start to drop back, and prospects for the rental market generally remain attractive, then the investor can move onto a regular buy-to-let deal.
However, if rates have not moved sufficiently for the sums to make sense, then the investor can instead look to sell the property, potentially delivering a profit that way.
Helping investors find finance
While some landlords feel more than comfortable arranging their own buy-to-let mortgage, the bridging market can be something of an unknown quantity. Where do you start?
This question was a driver behind our development of the Provide Finance platform, a desire to put investors in control of finding the finance needed for their property projects, whether it’s a complex buy-to-let deal, bridging loans, development finance or some other area of the specialist market.
Investors can swiftly search the market for the products that meet their needs, and then either apply directly or tap into the expertise of the Provide Finance team who can answer any questions about their case.
Bridging loans can play a vital role for wily investors in the months and years ahead, and our system helps investors access that finance in a way and timeframe that suits them.
Miranda Khadr is founder of Provide Finance
