How can a bridging loan help your buy to let business?
In this guest blog from Just Do Property, Daniel Owen-Parr, Head of Professional Sector & Auction discusses how a bridging loan could help your buy to let business at every step.
Time is money, and that’s never truer than in the private rental sector. So waiting weeks and weeks for a mortgage or fixed-term loan to be approved isn’t always an option.
One alternative is a bridging loan, which can often be arranged and funded within days. Here, we’ve looked at how bridging loans work and how they can be used by landlords and letting agents looking to grow their portfolio at various points during the buy-to-let lifecycle.
How bridging loans work
Bridging loans are designed to span the gap between a payment going out, and a payment being received. They last up to 12 months, and interest is charged monthly. Rates typically vary depending on the amount being borrowed, the equity in the property, the credit status of the borrower and the type of property itself.
In effect, they are interest-only loans. Monthly repayments cover the interest alone, and the principal loan is repaid in a lump sum within the terms of the loan agreement.
A bridging loan is one way to secure your first buy-to-let property – especially if you’ve been offered the chance to purchase at short notice, and can’t wait weeks and weeks for a mortgage to be approved and funded.
After putting down a deposit (or using another property you own as additional security), a bridging loan can often be funded within days – leaving you with the time you need to arrange longer-term borrowing.
You can use a bridging loan to leverage the equity you’ve built up in your property in order to expand your existing portfolio.
Alternatively, a letting agent could take advantage of a bridging loan to grow their business. They could put down a cash deposit or use their existing premises to take care of up-front expenses: securing the purchase of an additional office; completing a new shop-fit; hiring staff; and marketing.
A bill – like a self-employment tax bill – can throw any businessperson’s cashflow into disarray, and prevent them from focusing on the important job of running their business. A bridging loan can be used to clear the bills in the short term, while funds are raised by (for instance) selling property or assets.
A bridging loan can also be used to secure a new space while the previous one is sold, for example a letting agent looking to relocate or move to a larger premises. This may be helpful in instances where business operations must remain uninterrupted during a move.
Owning both premises temporarily gives a business the option to appropriately refit the new space, and migrate teams one by one.
In instances such as these, the bridging loan is repaid using the proceeds of the previous property’s sale as soon as it’s completed.
Cashflow pinch periods
Cashflow is an issue for many landlords and letting agents, and bridging loans can help those who need money in the short term to make money in the longer term. For instance, a landlord may need to invest in renovating a property in order to secure maximum yield from their tenants.