Using a commercial bridging loan to support your property venture is vital for securing the necessary funding to purchase a property and get it in sufficient condition for sale or rent.
With the UK bridging loans market reaching £10.9 million, it’s one of the fastest-growing lending markets in the country. Here’s everything you must know about commercial bridging loans for buy-to-let properties.
Can you get a commercial bridging loan for a buy-to-let property?
Commercial bridging loans are available in the UK to businesses and property developers seeking to involve themselves in the flourishing commercial property market. However, bridging loans for the commercial sector tend to be primarily offered by unregulated lenders.
Investors and developers prefer unregulated loans because of the extra flexibility and versatility they offer. Take note, the concept of “unregulated” simply means they are not overseen and protected by the Financial Conduct Authority (FCA). It in no way makes them any less legitimate.
What is a bridge-to-let loan?
Bridge-to-let loans, or buy-to-let loans, are a type of bridging loan that allows you to “bridge the gap” between purchasing a property and selling and/or refinancing. They’re short-term debt instruments and form the foundation of many a developer’s business model.
However, why not opt for a commercial mortgage instead of a bridging loan? The answer is in the business model. Developers often purchase properties requiring fast closing or significant refurbishment. In both cases, commercial mortgages are either too slow to approve or unavailable for these types of properties.
Bridge-to-let loans have stepped in to fill the gap. That’s why, in 2023, lenders transacted £831 million in bridging loans, which was a record high at the time. It demonstrates significant demand for fast, flexible financing without the archaic and often rather slow processes of traditional mortgage providers.
How bridge-to-let loans work
High-street lenders seldom offer bridge-to-let loans, as they were phased out after the Credit Crunch. Today, they’re viewed as a specialist financial product. However, they work similarly to any other bridging loan.
They’re short-term, with interest that can be paid monthly but is typically rolled up and repaid at the end of the term. Each bridging loan requires a certain amount of documentation demonstrating the feasibility of your project and a clear exit strategy for repaying the money.
Practically all commercial bridging loans are secured against a property, usually the one you’re buying. This means if you default on the loan, you could have the property seized to repay your debts.
Average term lengths for bridge loans range from 12 to 18 months, but some lenders may be willing to go as long as 24 months. When your term ends, two of the most common exit strategies come into force:
1. Sell – The most common exit strategy developers use is to sell the property after refurbishing it. However, this requires careful timing since bridging loans have such short terms.
2. Refinancing – If you want to keep the property on the books or still have work to do, you can refinance your bridge-to-let loan. Essentially, this means using a different product, such as a commercial mortgage, to replace your existing bridging loan.
Who is eligible for a buy-to-let bridging loan?
Every lender will have their own criteria to determine whether someone is eligible for a loan. However, most lenders also have standard criteria that apply industry-wide. For example, you can apply if you’re an individual or company. Also, you must show that you’re either a UK citizen living overseas or a UK resident living in the country.
Other eligibility requirements bridge-to-let lenders might levy include:
· Loan-to-Value (LTV) – Your LTV is the estimated value of the property post-development compared to how much you’re borrowing. Most lenders will have a maximum gross LTV of 75%. Higher LTVs can sometimes be obtained.
· Security – You must provide a high-value asset to act as security. This can be the property you’re buying and/or alternative assets.
· Exit Strategy – Lenders require a clear plan for how you will pay them back, known as your exit strategy.
· Creditworthiness – Your credit is less important with a secured commercial bridging loan, but lenders run checks as standard. Clean credit will always unlock better rates. If you have bad credit, a broker can help secure the lending you need.
· Experience – Being inexperienced won’t necessarily stop you from securing a bridging loan, but it could make your life more difficult with some lenders. Certain lenders may prioritise experienced developers.
Securing a bridging loan for buy-to-let properties
Securing a buy-to-let bridging loan follows the same process as all bridging loans. Submit your application, wait for an answer, allow the lender to survey your property, handle the legal paperwork, and receive your money.
However, most applications fail because borrowers don’t consider the lender’s criteria. Most lenders rely on automated systems, meaning if your application does not stand up to scrutiny, it will be discarded immediately.
The best way to secure a bridging loan is to work with a specialist financial broker. By working with a broker, you can work with a market expert who can review your application and submit it on your behalf. This ensures that you meet the lender’s criteria and have the greatest chance of success. Moreover, brokers provide transparent and honest advice, allowing you to secure the best rates.
On a side note, some lenders only accept applications delivered through brokers, so working with a broker provides more options.
Can you use a bridging loan to renovate the property?
Bridging loans can be used for purchases, but also for renovations and conversions. Using bridging loans for this purpose is a typical business model development businesses use. Some will then keep the property as an asset, allowing it to generate a consistent income, or they will flip it.
Do you need a business valuation for a buy-to-let bridging loan?
Business valuations are mandatory for properties when applying for a commercial bridging loan. Alternatively, if you already own the property and want to refurbish it, the valuation will focus on your project’s post-development value and commercial viability.
At Hilton Smythe, our financial brokers can support you in securing a suitable buy-to-let bridging loan. We have a vast network to leverage and know precisely where to turn to secure the best rates on your behalf. To learn more about how our financial experts can help your application succeed, contact the team now.
