Landlords should look beyond the buy-to-let mortgage when considering funding options, as bridging finance is being used every day to help property investors make the most of opportunities that come their way.
Bridging finance is a short-term loan designed to provide rapid access to capital, making it a valuable tool for landlords seeking to seize opportunities or overcome temporary financial shortfalls.
In today’s property market, landlords often require fast, flexible funding solutions to secure deals, improve their portfolios, or diversify income streams. Here, I explore the various ways bridging finance can be a game-changer for landlords.
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Supporting auction property purchases
One of the most common uses of bridging finance is to facilitate property purchases at auction.
Auctions require buyers to complete transactions typically within 28 days of the hammer falling, leaving little time to arrange traditional mortgages. Bridging loans provide a quick and effective alternative, enabling landlords to secure their desired property without delay.
Properties bought at auction often need refurbishment or structural work before they can qualify for a standard mortgage.
Bridging finance can also cover the costs of these improvements, ensuring landlords can enhance the value of their investments and prepare them for long-term financing or letting.
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Improving portfolio quality
In an era of lower buy-to-let profits, many landlords are leveraging bridging loans to adapt their portfolios for higher yields.
For example, converting a standard three- or four-bedroom house into a House in Multiple Occupation (HMO) with five or six units can significantly increase rental income.
Over the past year, there has been a notable uptick in landlords using bridging finance for HMO conversions, either on properties they already own or on new acquisitions.
In addition, landlords are increasingly finding that they must navigate the complexities of today’s planning environment, where applications are often delayed by additional requirements, such as biodiversity studies.
Bridging loans provide the flexibility to move ahead with projects while waiting for formal approvals, making them extremely useful.
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Funding property conversions
The versatility of bridging extends to property conversions. Landlords are more and more using these loans to adapt properties for new purposes, such as converting commercial spaces into semi-commercial or fully residential units.
Semi-commercial properties, for instance, are gaining popularity among investors because of their ability to diversify risk and offer potentially higher yields.
These properties combine commercial and residential elements, generating income from multiple sources.
Even if one part of the property remains vacant temporarily, the other can still provide revenue, making them a robust choice for landlords.
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Flexible repayment options
Bridging finance offers landlords various interest repayment options to suit their circumstances. These flexible options ensure landlords can tailor their financing to their cash flow and project needs.
Rolled-up or retained interest is where the interest is added to the loan balance and paid at the end of the term, making it ideal for properties undergoing refurbishment that do not generate income during the loan period.
Meanwhile, ‘serviced interest’ sees monthly interest payments made by the borrower, suitable for landlords with steady income from other sources.
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Innovative funding opportunities
Bridging finance opens up opportunities many landlords might not initially consider. For example, it’s possible to secure 100% funding using lowly-geared existing portfolio properties as additional security, enabling landlords to acquire properties below market value at auction, refurbish them and refinance at a higher value.
In some cases, refinancing at 75% of the post-works value can clear the bridging loan and even cover refurbishment costs, leaving landlords with surplus funds.
Additionally, some bridging lenders will lend on a second charge basis, allowing landlords to leverage equity in their existing properties to fund new ventures.
A few things to consider when using bridging finance
Have a clear exit strategy
It’s important to understand that a clear and realistic exit strategy is essential when applying for bridging finance. Lenders must be confident that borrowers can repay the loan within the requested loan term.
Common exit strategies include refinancing the property at an enhanced value post-refurbishment or selling it outright.
Landlords should also have contingency plans in place in case their preferred exit strategy faces delays. For example, securing a backup buyer or having pre-approval for refinancing can reassure lenders and ensure the project stays on track.
The role of brokers
Navigating the world of bridging finance is often best achieved with the guidance of a knowledgeable broker. Brokers play a pivotal role in the process, helping landlords identify the most suitable products and lenders, structuring deals efficiently, explaining the nuances of interest repayment options and exit strategies, as well as managing the application journey with the lender.
A skilled broker can also uncover opportunities that landlords might not have considered, such as using bridging loans for portfolio diversification or accessing funding for larger-scale projects.
Bridging finance is more than just a short-term funding solution; it’s a versatile tool that empowers landlords to act decisively in a competitive property market.
Whether securing auction purchases, improving portfolio quality, or adapting properties for higher yields, bridging loans provide the speed and flexibility landlords need to succeed.
With careful planning, a clear exit strategy, the support of an experienced broker and choosing the right lender, landlords can unlock the full potential of bridging finance to achieve their investment goals.
Gavin Diamond is chief executive officer at Inspired Lending
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