Bridging offers vital Plan B for landlords in rising rate environment

"The price differential between bridging loans and regular buy-to-let mortgages has shrunk significantly of late, to the point that bridging loans are now only marginally more costly."

Landlords have plenty to think about at the moment. A growing number of them are starting to consider the new Energy Performance Certificate (EPC) rules, and the higher minimum standards that are likely to be needed for rental properties in years to come.

The significant increases to mortgage interest rates on buy-to-let mortgages is also a big challenge. The higher interest costs mean that it is not only tougher to pass affordability tests but also to make the sums add up for continuing to hold certain investment properties within the portfolio.

Given this situation it makes sense for landlords to favour some flexibility, to ensure they have the ability to change course if and when the situation improves. One option, that is easy to overlook, comes via bridging loans.

Opting for flexible funding

In normal circumstances, the task of refinancing an investment property is somewhat straightforward - the mortgage adviser simply has to work out what sort of buy-to-let mortgage is best for the landlord and their attitude to risk at that time.

But we aren’t in normal circumstances at the moment. The rates on buy-to-let mortgages have grown so substantially that landlords face much higher repayment costs on the loans. The thought of being locked into repayments at these levels for a couple of years at least is not exactly an enticing one.

Bridging loans offer an excellent alternative though. The price differential between bridging loans and regular buy-to-let mortgages has shrunk significantly of late, to the point that bridging loans are now only marginally more costly.

Signing up to a 24-month bridging loan, rather than going with a traditional buy-to-let mortgage, offers the landlord much more flexibility. They can hold out until interest rates start to fall to more palatable levels, allowing them to also take steps to reduce their debt level and LTV ahead of refinancing down the line.

Heading for the exit

This flexibility can come in particularly useful for landlords who may be considering offloading some of their portfolio in the next year or two. We know that plenty of landlords are reconsidering their options here - research earlier this year from the National Residential Landlords Association suggested around a third of all landlords are planning to cut the number of properties they rent out.

In some cases, this will be to improve the gearing of their portfolio, or raise the required funds to support their lifestyle. Others may simply want to offload properties that would require extensive - and potentially expensive - work in order to meet the new EPC requirements.

However, selling properties can come with a significant downside if the landlord is locked into a fixed rate. The exit fees associated with paying off the financing on that property can be substantial, amounting to many thousands of pounds. That’s an added cost that no landlord is going to be particularly thrilled about taking on at the moment.

By contrast, there are usually no exit fees involved with a bridging loan. As a result, landlords can sell up some of their portfolio whenever they choose, without having to worry about paying any exit fees.

Whether the landlord is looking to sell up some of their properties, or simply hold fire until rates drop to more acceptable levels, the lack of ERCs on bridging loans offers them valuable flexibility and avoids them being locked into a more costly deal for a lengthy period.

Working swiftly

Time is always of the essence for investors, particularly if they are facing a tight deadline for refinancing existing properties in their portfolio.

That’s why, if the bridging loan option is embraced, it’s crucial to work with reliable and swift lenders. That means opting for those who can be trusted to deliver and who have a wide range of funding sources so won’t leave you and the client in limbo.

Process is also incredibly important. At Tuscan we have worked hard on our Fast Track process, which makes the most of AVMs or desktop valuations to ensure that cases proceed at the speed needed by borrowers.

It comes down to an understanding of what is most important for advisers and borrowers alike. Flexibility and a fast process can make all the difference for landlords weighing up their options in the current challenging environment.