Bridging Finance Eases First Time Buyers Into The Property Market
By Faruque Ahamed Mollick | Aug 15, 2023
Both buying and selling may be overwhelming in their own right, what with putting your home on the market, opening houses, and making offers. Consider the burden of coordinating settlement dates and maybe losing your dream home, all while trying to sell your current home... it's enough to make anyone break out in a cold sweat.
Investors usually require quick and dependable financing to complete the transaction when buy-to-let opportunities arise. Furthermore, new buyers may need funding for necessary property modifications to qualify for mortgage loans and assist in attracting their initial renters.
Securing money is not always easy if you are new to buy-to-let investing. After all, you don't yet have any rental income, and typical high-street lenders may be hesitant to approve loan requests if you haven't established your credentials as a property specialist.
Meeting clients that are juggling both regularly, here is where bridging finance can help. They are especially handy for first-time investors because they are flexible and quickly set up.
To assist you, we will take a closer look at bridging finance and how they can assist you in starting your buy-to-let adventure.
What Should New Landlords Know About Bridging Finance? As its name suggests, bridging loans were first developed to help property buyers 'bridge' a finance gap. It's not always possible to get the timing right when selling one property and buying another. There may be a period of time when you need to complete your buy, but the money is still pending from the sale - this is known as a "broken chain" scenario.
Short-term loans — specifically, bridging loans — can help in these instances by providing a short-term loan to support your purchase while utilising the property as collateral. You'll repay the loan after the related sale is finalised.
On the other hand, this form of financing isn't merely for smoothing out a sale and purchase transaction. It can also be used to fund a variety of expenses related to the purchase and refurbishment of real estate, which is why it is very beneficial to first-time investors.
Why Do Buy-To-Let Investors Require Short-Term Funding? As a potential landlord, you're almost definitely seeking two things from your new investment: a high rental yield and the possibility of capital growth. You'll want the property to earn a solid income from rent, and you'll want it to have gained in value when it comes time to sell.
A semi-detached house ripe for conversion, a flat in a trendy neighbourhood, or an inherited property with new owners eager for an immediate sale could benefit from bridging finance to enhance value and produce a steady rental income stream.
Unless you're lucky enough to be a cash buyer, you'll need to finance your investment with a buy-to-let mortgage in the long run. However, as many first-time buyers learn the hard way, it's often vital to act swiftly to take advantage of the most pleasing possibilities — often even faster than the time it takes to secure a mortgage.
The Need For Bridging Loan Lease Extension
You come across an apartment with the excellent rental potential offered for sale at an extraordinarily low price. The title is provided on a lengthy leasehold basis, as in other flats. The rationale for the price reduction is that the leasehold expiration date is rapidly approaching.
Even after considering the expected costs of extending the lease, this is still a good investment. The issue is that the lease term is too short for a regular lender to consider it for a mortgage. In this situation, a bridging loan might be used to cover both the purchase price and the lease extension cost.
The auction room can be an excellent place for a novice landlord to find a suitable rental property at a reasonable price. But keep in mind that after your successful bid is accepted, a 10% deposit is usually required on the day of the auction, with the balance due around a month later. If you can't get the deposit funds together in time for the auction or your buy-to-let mortgage seems like it won't be in place by the completion date, bridging finance can fill the gap.
A 'distressed' transaction is when the seller is desperate to sell the home as soon as possible - another great opportunity to get a great deal. For example, suppose the estate agent tells you that the buyer is willing to take a significant discount off the list price provided you can close within the month. If your timetable for finalizing mortgage arrangements is too tight, a bridging loan calculator can help you out once more.
Essential Property Improvements
The overall goal for many buy-to-let investors is to purchase a property and then renovate it to a standard that maximizes its rental potential and value. Traditional lenders are reluctant to issue a mortgage if the house is uninhabitable at the acquisition time (for example, with no working bathroom or kitchen). A bridging loan might be a great way to get the money you need to get the job done.
Bridging finance can be used to cover the purchase of the property as well as the cost of remedial work to transfer to a mortgage after the property meets the lender's requirements.
Is Seeking Out A Bridging Finance Always The Best Option?
There is a clear exit strategy in each of these cases. To put it another way, the investor has a clear strategy for repaying the bridging loan, which usually entails transitioning to a buy-to-let mortgage.
Suppose you have a more ambitious buy-to-let idea, such as converting a home into self-contained flats. Don't worry about obtaining specialized development funding to help you get started. Remember that this sort of financing is only appropriate for instances where you require cash for a limited time (typically less than a year), and you know how to repay them.
It helps if you have access to a bridging loan specialist to secure the best possible terms and a flexible, customized arrangement. If you want to learn more about making the most of your property changes, contact UK Property Finance.