Bridge-To-Let Loans: A Guide to Financing Your Next Investment Property

From January 2023 to March 2023, house prices plummeted by over 3%, marking the biggest drop since 2009. Many experts are predicting a prolonged drop in prices, countering the drastic spikes we’ve witnessed recently, and as an investor, it’s smart to be keeping a keen eye on the market.

In this article, we take a look at a few smart financing options for property investors and what they entail. From traditional mortgages to a bridge-to-let loan, these tips will ensure you’re ready to snap up prime property when the opportunity arises. 

Conventional Bank Loans

Conventional financing for property investments is, in other words, a mortgage. This is the obvious choice for buying an investment property, with the benefits of being safe, stable, and accepted by all estate agents. 

A conventional mortgage for a home relies on a downpayment, usually of around 20%, though it can be as little as 10% for first-time homebuyers. However, as an investor, your lender may require as much as 30% of the total mortgage. 

You’ll also need a good to excellent credit score and detailed credit history. A reliable income and any assets are also taken into account. Future rental income usually isn’t part of the approval process. 

Although you may not be looking to invest in the property market until it drops further, it’s smart to get pre-approved for a mortgage. This will allow you to act quickly if a crash comes (Lloyds Bank predicts a drop of between 9-18% in 2023) and secure the bargains you’re waiting for.

Bridge-to-Let Loans

Bridge-to-let loans are a more contemporary option for financing your next property investment. Based on the bridging loan model, these loans are intended to provide a short-term sum of money allowing you to secure a property without a traditional mortgage. 

Dan Luxon, CEO of Clarity Development Finance gave us his insight into the current bridging market, “The buy-to-let market has been particularly upset over the course of recent market volatility. Lenders have see-sawed through the last 2 years. Uncertainty around products, restricted loan-to-values, hiked interest rates, and unrealistic stress-testing have all made getting a buy-to-let mortgage a fraught process.

“However, one area of property finance that has remained relatively steady, delivering competitively priced products for property investors is the Bridging market. And we’re seeing bridging used with increasing frequency by buy-to-let portfolio owners.”

Most investors use bridge-to-let loans when they need to move quickly. For example, if the market drops or you're purchasing a property at auction but you haven’t prepared, this option can enable fast action due to quick approval. 

Once you’ve bought the property, you can then look into refinancing with a traditional mortgage for a longer-term loan option. “A bridge cannot replace a longer term mortgage and in general will still be more expensive than a term product. However, the cost difference right now in many cases is small. This means that a bridge-to-let product has a number of very real advantages,” Dan said.

Smaller Bridging Options

Bridging loans aren’t just an option for mortgages. After acquiring your property, a bridging loan can aid in funding everything from refurbishments to smaller operational costs such as safety certificates and property inspections.

Once you’ve let the property and are receiving monthly rent payments, you can pay the loan back quickly. 

Advantages of a Bridge-to-Let Loan

With the current turbulence in the UK’s property market and with the high cost and lengthy process of traditional financing, the advantages of bridge-to-let products are increasingly prominent.

1. Buy-to-let mortgages are currently taking anywhere between 2 and 6 months and in most cases, this will jeopardise the purchase of the property. A bridge that can then be refinanced into a BTL mortgage can be completed in as little as 10 days.
2. Where historically bridge loans have been considered a last-minute expensive option, movement in the market has meant that bridge-to-let loans can be agreed at almost the same price as a BTL mortgage (between 6.5 - 7.5% annual interest rates compared to a typical company BTL being 4.5-5.5% annually). 
3. Many bridging companies now offer specific products that make it easy to segue from a bridge-to-let loan to purchase into their own BTL product.

Private Money Loans

Private loans are transferred from one individual to another without the need for a financial institution or certified lender. Usually, private money loans are sourced from family members or friends.

A huge perk of these loans is that they can be offered without any interest (or with very minimal interest) and don’t require a lengthy approval process. 

If you don’t have a friend or family member with enough money to cover the cost of your property, you can find private loans from professionals. Individuals attending real estate investment networking events, for example, may be interested in giving you a loan in return for a share in the property or a pre-arranged interest rate. 

Be aware, though, that not every private lender will offer favourable terms. Be sure to do your research and read contracts thoroughly before agreeing.

Home Equity Financing

Home equity loans are a little more niche than other options. You must be over 55 years of age and already own a property to be eligible. But, if you do meet the criteria, this form of financing can work well for property investors.

The home equity loan model works on the basis that you’re lending against the equity you’ve built up in your home. It’s a way of releasing the money you’ve tied up in the property without having to sell. For investors looking to flip a property or purchase rentals, this loan can quickly pay for itself.

Tips For Getting Approved For Property Financing

The approval process for loans can be pretty stressful, but there are plenty of ways to make it easier. 

1. Ensure you have everything you need in advance, including your financial statements, proof of income, and any identification you may be required to present.
2. Use quality landlord accounting software to accurately track your investment profitability and easily prove financial security with detailed and accurate financial reports.
3. Ensure your credit score is up to scratch before beginning the process, too. If it’s not, look into loan options for investors with poor credit history. 
4. Pay off outstanding debts to make your application more likely to be approved, and ensure all information you provide is accurate. 

Once you’ve secured the property you can add it to Landlord Studio and ensure you’re tracking your rental property finances accurately from day one. Landlord Studio is a property management and accounting tool designed for landlords. Track tenancies and manage, set reminders for important events like safety certificate renewals, and easily track income and expenses with powerful automation features including an in-built receipt scanner, bank feeds for fast transaction reconciliation, and powerful financial reports.

Final Words

As a property investor, there are multiple options out there to make financing your next purchase a lot simpler. Hopefully, this article has given you some insight and tips to help you secure your future loan. Just remember to keep your financial records in order with the help of software such as Landlord Studio making it a breeze to prove your business profitability for quick, easy loan approval. 

Find out more about how Landlord Studio can help you manage your buy-to-let finances here →

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