That the UK has a housing shortage is no secret. Legislators, housebuilders and developers all have their work cut out for them in addressing the supply imbalance that is seeing the cost of both buying and renting a home shooting upwards.
The explosion of the buy-to-let sector has at least gone some way to stabilising rents, with the average national rent having recently increased below the level of CPI (Consumer Price Index) inflation for the thirteenth consecutive month 1. Throughout this period, the number of buy-to-let mortgages issued for new purchase has shot up by over a third 2.
Investors’ reliance on mortgage finance can lead to the occasional obstacle, however, particularly where ‘unconventional’ purchases are concerned. As important as it is to build new homes, it is equally vital to bring back into circulation the circa 630,000 empty properties 3 that have fallen into disrepair and become unusable.
Many investors are attracted to these properties because of their low cost. However, they require renovation to bring them up to a habitable standard, and very few mortgage lenders will advance loans for properties that are in need of major work.
A Catch-22 situation
Lenders will normally grant mortgages for uninhabitable properties on a ‘full retention’ basis. This means that they will agree to the mortgage, but will not release the funds until the works have been completed to a prescribed standard.
This Catch-22 situation is familiar to many investors: you can’t buy the property because the works haven’t been completed, but you can’t complete the works because you haven’t bought the property.
This would ordinarily mean that you would need to finance the purchase and the works yourself – a significant cost that is outside the reach of many buyers, particularly those who are new to property investment. Fortunately, there are other ways of obtaining the funds you need.
1. Refurbishment mortgages
Some lenders offer ‘light refurb’ mortgages which are lent on a part retention basis. During the application, the lender will obtain a pre-works and a post-works valuation; then, before the works commence, they will forward a proportion of either the purchase price or the pre-works value. They will also retain some of the funds to be released once the works are complete.
These loans are subject to lower LTV (loan to value) requirements than other buy-to-let mortgages; typically, a lender will want to see at least a quarter of the purchase price up front.
Furthermore, these products tend to only be suitable for properties where minor refurbishments are required (those that would enhance the value and appeal of a slightly dilapidated property). Where major restorative works, planning permission and/or other forms of approval are needed, you are likely to need a commercial refurbishment loan, which on the whole are more expensive and require a slightly larger outlay (25–30% of the purchase price).
2. Bridging loans
Bridging loans were once the black sheep of the commercial finance market. This was probably down to lack of understanding about the product, their relative scarcity, and their high cost. Just three years ago, they were dismissed as a ‘last resort’ for ‘trapped’ home-movers 4.
Now, they are a vital tool in many an investor’s arsenal, and a booming marketplace has resulted in competitive interest rates and flexible terms.
Intended for very short terms of up to 18 months, bridging loans are so named for their use as a stop-gap between making a purchase and obtaining the main line of credit, such as a mortgage. Though some lenders have strict criteria, others will accept almost any type of property or land as security, and the funds can be raised for any legal purpose.
Bridging loans can be risky for borrowers without an exit strategy. These are known as ‘open’ bridging loans, and they often come with higher rates to reflect the added risk. Instead of ending when the longer-term finance is due, open loans run for a set period, after which the loan must be repaid – by the repossession of the asset, if necessary.
Also note that, whilst bridging loans can have terms as short as one day, many mortgage lenders will not finance a property that you have owned for less than six months.
3. Bridge-to-let loans
Some lenders will fund both the short- and long-term stages with a ‘bridge to let’ product, where the goal is to renovate the property to make it suitable for renting. Alternatively, it is possible to keep your options open by opting for short-term finance that allows you to ‘term out’ to a full mortgage.
This option has the advantage of having a clear exit strategy in place for the bridging portion of the loan, and having both products under one roof can make the transition easy and efficient. However, lenders will often charge a fee to borrowers terming out to the second stage of the loan.
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
Some bridging loans, buy-to-let mortgages and commercial mortgages are not regulated by the FCA.