How to avoid being left on high interest rate finance with the help of a New breed finance solution ‘Bridge to Let’
If you are a builder then the last thing you need are finance problems with your refurbishment work. Being stuck on a high rate development finance can eat into your profit quickly and tie-up your capital for your next project so a bridge to let product might be what your looking for.
At Niche Advice we offer appropriate advice on how to avoid being trapped on high interest rates. This is particularly relevant if you want to let the property rather look for a quick sale.
Traditionally the strategy has involved a conventional buy to let remortgage but more recently there has been a new breed of hybrid products ‘bridge to let’. This bolts together the development finance and exit route to a term loan. Depending on the Lender there can be massive advantages of this joined up thinking, for example:
- One set of underwriting.
- Assurance that the ‘take-out’ remortgage is in place.
- Legal cost savings as the same solicitors oversee whole transition.
- Unlike other development finance the bridge element normally has no early repayment charges.
Like all development solutions the Lenders like to have good equity in the project at all stages of the development, typically a minimum of 30 percent. In the development stage part the Lender may allow you to roll up the interest and fees. The better Lenders allow this ‘roll-up’ above the loan to value limit. In the second mortgage stage there is another valuation which allows you to draw out money against the finished value.
For example, Rob the Builder has bought a run-down house in Leeds for £100,000 in cash. It needs a complete refurb including bathroom, kitchen and side extension. The Bridge to Let Lender provides £35,000 for the project on day one.
The interest is circa 0.65%pcm and is added on top of the £35,000, ideal at this stage you are of course not receiving any rental income. Depending on the Lender they may impose a time limit on the roll-up, typically 6 months, before they will ask for the interest payments to be serviced monthly – so the scale / length of project is important to factor in. In Rob’s case he thinks his project should take under 2 months so no issue there.
The house next door had similar work down on it and is currently valued at £175,000. Once the work is completed Rob’s plan is to use the second element of the bridge-to-let product (the mortgage part) to borrow 75%. Assuming the property values at the same level as net door this will release £131,250 and allow him to pay off the bridge and its interest charges, and help fund the next project. The mortgage element can be at a rate under 3% fixed for 5 years, which should enable the rental income to produce a sustainable and regular income.
IMPORTANT as the solution is seamless and competitively priced the Lenders will only consider lending to experienced landlords or builders.
Niche Advice offers appropriate advice on all types of property finance including refurbishment / development finance. To find out how we can help you complete the online form under the Contact section on our website or call T: 020 7993 2044.
Author: Payam Azadi
Payam Azadi is a partner at Niche Advice who are whole of the market Independent Mortgage Brokers. His role is very much focused on Property financing both on residential and commercial lines.