'Building with bridges makes commercial sense'




The BTL sector is either in rude health or on death’s door, depending upon the type of landlord you speak to.

Accidental/dinner party landlords — or those that are highly leveraged — are leaving the market in their droves as being a landlord is no longer for the faint hearted.

The reasons for this are well documented, from dwindling yields to tax reforms, to increasing protections for tenants, to falling property prices to new regulation.

The list seems to get longer by the day.

While professional landlords may have more opportunities and tools in their bag to survive the current market conditions (and indeed thrive), they are also under increased pressure to sustain their business profitability. 

Being a successful property portfolio landlord hinges on one word — yield — or the positive percentage difference between outgoings and rental income.   

Landlords are increasingly becoming more creative in how they either maintain or increase their yields in our current high interest rate environment. 

Many have turned to converting larger dwellings into self-contained flats or HMOs/MUFBs as a means to increase yields or are upgrading their existing portfolio as an opportunity to drive up rental incomes.

Unless they have cash reserves, funding such conversions or improvements can be difficult through raising finance.

Indeed landlords may be reluctant to do so if they still have low interest rate fixed-term deals in place which they don’t want to disturb. 

In recent weeks sourcing funding has become acutely difficult, not just because of rising interest rates, but due to lenders increasing their stress tests to ensure their borrowers can meet their repayment schedules in scenarios of even higher interest rates.

While some will have had these types of properties on their books many have turned to auction to snap up a bargain and in either of these scenarios, bridging finance comes into its own.

Simply because of the flexible approach bridging lenders take to the types of property they will support.

Unlike the high street banks and building societies, bridging lenders focus on the final value of the property, not its current condition, so if it is uninhabitable or requires major conversion works then that isn’t a blocker to securing funding.

Second and even third charges are available meaning that current deals can be left to run their term.  

It is this flexible approach and highly competitive interest rates that is driving the boom in bridging lending.

With rates available from 0.55% per month (with a 2% product fee) there is no longer a gulf in pricing between bridging finance and shorter-term fixed deals, especially as many two-year fixed rate deals come with higher 3% arrangement fees.

There are also other advantages baked into the price of bridging including the final repayment of the loan being penalty-free.

Once conversion is completed and tenants in place, it is typical for the bridge to be repaid and finance switched over to a fixed term BTL deal.

As bridging is available for up to 24 months this switch does not have to be rushed into and landlords can decide when to exit — for example when more attractive rates eventually come to market.                           

As rates continue to increase and the pinch of yields for even the experienced landlords becomes harder, some are looking at the commercial sector, as mixed spaces can provide two sources of income.

Rents can be drawn from both the retail and residential elements of the property; this arrangement can also mitigate the risk of voids because when one is vacant, income can still be drawn from the other.

Again, this is where bridging finance comes into its own as high street lenders will not consider semi-commercial properties or indeed fund any conversion works.    

It is undoubtedly a tough market for both landlords and their mortgage advisers at the moment, but when both parties are working together — experienced and skilled — opportunities exist for both to thrive.

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