It's not just the headline costs that have increased
Short-term finance is quicker, more accessible and now more competitive than ever against traditional buy-to-let, says Steve Smith (pictured), sales director at Roma Finance.
Alongside the rest of the mortgage market, buy-to-let rates have soared over the last two weeks.
Lenders have pulled and relaunched products, many with rates now upwards of 6%, and some have introduced higher fees, including up to 5% of the sum borrowed.
And it’s not just the headline costs that have increased.
Tighter affordability criteria
Lenders have started to tighten stress tests too, with some requiring rental income to cover 140% of mortgage payments at stressed rates of up to 8.49%.
This combination of fewer available buy-to-let mortgages, rising rates, higher fees and tighter affordability criteria will simply preclude many landlords from buying a new property, especially in higher-value areas.
More worryingly, rates haven’t stopped rising yet.
The Bank of England has already strongly hinted at further increases, meaning the direction of travel is upwards on mortgage rates across the board.
If a landlord discovers a property purchase opportunity, they could find they simply can’t access funding in the traditional buy-to-let mortgage market.
But there is a different approach they could take, as the differential between buy-to-let mortgage rates and bridging loan rates is suddenly smaller than ever, making bridging a competitive alternative.
Benefits of bridging
Bridging loans are already widely used by buy-to-let landlords for a whole host of reasons.
They are very quick to arrange, meaning landlords can take advantage of buying opportunities to secure a property at speed. This is particularly useful on auction purchases, for example.
They can also be arranged on properties that need minor or more extensive refurbishment works. If a landlord wants to buy a property to let that doesn’t have a fitted bathroom or kitchen, for example, it won’t be considered habitable and is therefore unmortgageable in the mainstream buy-to-let market.
A bridging loan allows them to secure the property, make the improvements and then refinance to a buy-to-let mortgage 12 months down the line or earlier if the property is lettable. Bridging loans don’t have ERCs so they offer flexibility if the landlord doesn’t know exactly how long improvements will take.
Now the costs of bridging make it even more appealing to landlords looking for a short- to medium-term funding solution.
Typical bridging loans start from 0.69% a month.
This is effectively an annualised rate of 8.7%.
Historically, that’s been a significant premium on standard buy-to-let loans, so bridging is usually chosen by landlords who either need to move quickly, or who can’t get a buy-to-let mortgage (because of the property or their own credit profile).
Now the gap is closing between buy-to-let and bridging loans and the latter are starting to look very attractive, especially in the light of the higher stress tests being used by some lenders.
Most bridging loans are available up to 75% LTV for 12 to 24 months.
At this point, or sooner if they prefer, the landlord could remortgage on to a standard buy-to-let mortgage.
What about bridge-to-let?
Some bridging loan providers also offer bridge-to-let, which enables borrowers to move from a short-term bridging loan onto a medium-term, five-year buy-to-let product with the same provider.
Bridge-to-let rates vary but, at Roma, we offer a product at 4.49% plus Base Rate, so currently 6.74%.
This means your client could quickly secure a two-year bridging loan before moving onto a bridge-to-let for five years, potentially taking them up to 2029.
Know the risks
Of course, like any decision in the current market, there is a risk of action and inaction.
Buy-to-let rates could be even higher when the borrower exits a bridging loan or bridge-to-let product, but that would apply with a standard buy-to-let product too.
It’s also the case that bridging loan providers are not immune to the rising costs of borrowing, although our different approach to funding means many of us have been able to hold rates up to now.
Let’s be honest, it’s difficult to plan a week in advance in the current climate, let alone a year or more.
So, if a bridging loan suits the borrower today, it could be a useful way for them to secure funding to buy the property they want at a competitive rate.
It’s definitely worth another look.