Many landlords finance buy-to-let properties using commercial mortgages. Bridging loans can be an alternative to commercial mortgages.
Commercial mortgages for buy-to-let properties are becoming more difficult to obtain. New affordability rules mean that loan applications need to be on properties where rents will cover at least 125% to 145% of the mortgage repayments if the interest rate were to go up to 5.5%. Tax relief on the interest payments has been cut in 2017 making commercial mortgages more expensive.
Bridging loans are not subject to the same affordability rules. A bridging loan assessor calculates the risk of the loan by looking at the individual circumstances of the deal and the borrower. A three-year bridging loan can be obtained at a reasonable interest rate, and for some landlords this is a viable alternative to a commercial mortgage. If a landlord can afford to repay the loan within three years, then bridging finance can mean that a buy-to-let property deal is profitable.
The loan to value of a bridging loan is around 70%, which is approximately the same loan to value rate for many commercial mortgages.
A bridging loan can be used to purchase a low yield property for which a commercial mortgage is unavailable under the new affordability rules. The property may not show a profit during the period of the loan, but once it is paid off, rental yields and capital growth can make the whole operation create a reasonable profit.