The Bank of England’s Prudential Regulation Authority (PRA) has introduced more stringent affordability lending rules for buy-to-let landlords, but these do not apply to bridging finance.
Under the new rules, to obtain a commercial mortgage for buy-to-let property, landlords need to show that rental income will be at least 145% of the mortgage repayments at a hypothetical interest rate of 5.5%. Some lenders have already applied these affordability rules to commercial mortgage applications.
The newly formed EU Mortgage Credit Directive could yet make the lending rules even more strict.
The PRA has confirmed that there are exceptions to the tougher affordability tests. Loans for holiday lets, property investment lending and bridging loans are all exempt.
Though bridging loans are a short-term solution, many landlords use them if they do not have enough cash to purchase new property. They are especially useful to purchase properties at auctions where the full purchase price is required within a few weeks. Landlords also use bridging loans for property renovations.
Bridging loans are unlikely to replace long-term commercial mortgages but they can be useful for landlords. They can be arranged quickly and, as long as there is a clear exit strategy for when and how the loan will be repaid, they are relatively easy to obtain. Loans can be open with no fixed repayment date, or closed with no fixed repayment date.
A bridging finance broker can provide advice and arrange a suitable bridging loan.