Buying a house is becoming more difficult for everybody, says the International Monetary Fund (IMF) stating that the housing market will get worse before it recovers.
This is down to big banks trying to recover from mounts of debt, the housing bubble, and a decrease in competition in the mortgage industry.
This is not only affecting would-be homeowners, but also the buy-to-let sector, where mortgages are becoming stricter. Normally, rental income must be at least 125% of the mortgage repayments, and a deposit of about 40% is needed.
Increasing rental returns have, however, created more interest in buying to let. There is strong demand from tenants for rental accommodation, as many cannot afford to buy their own homes.
Landlords use Bridging Loans to Raise Money
Landlords are now able to add considerable numbers to their property portfolios with bridging loans, which allow investors to borrow on the equity contained within their assets.
Bridging loans are short-term lends that are secured on investments that you own, for example, a property. In the past, they have been useful for people who are in a property chain, but needed when the chain fails or is going to take a long time. The loan allows you to continue with the transaction and obliges selling the property at a later date, and paying back the money.
Because the bridging finance market is growing, loans are now available on other assets. The money has been used to buy yachts, pay outstanding corporate tax, and business development finance.
They are ideal for the buy-to-let market in terms of expanding landlords’ portfolios, by finding good deals in property auctions or quick sales.
A bridging loan will give investors the advantage of not being part of a buyer chain. A transaction should be able to be finalised very quickly, and a discount may be able to be negotiated.
The promptness of transactions is one of the top benefits, as they are often completed within a week. This is helpful when a property is up at auction or when it is repossessed.
Interest can also rollover to the end of the loan for a greater repayment. This is useful if a property will not be making any money whilst in renovated, for example. Once refurbishment is complete, the loan can be paid back once the property is sold, or once tenants have moved in.
Landlords can sometimes need to redevelop or convert a property for the rental market, but cannot qualify for buy-to-let lending until there is a full rental valuation. Bridging loans allow an investor to fund the renovation stage.
Loan to value (LTV) rates can be increased by combining equity in other assets, and loans can be provided to cover maintenance, in addition to the value of the property.
However, bridging loans aren’t a long-term solution, as they must have an appropriate exit strategy in place. Buy-to-let is still the best option for buying properties intended for the rental market. Although bridging finance does offer solutions for landlords planning to refurbish.