It has been a tough couple of years for buy-to-let landlords, especially those that are looking to break into the business for the first time or grow their portfolios. The housing crisis combined with tougher and tougher regulations have put up all sorts of challenges for those looking to found or expand their rental businesses.
This means that many landlords are beginning to need to look into alternative ways to finance their projects and make some progress in their rental endeavours. One of the most promising alternatives so far is a financial product called "bridging loans".
What are bridging loans?
Bridging loans are a short-term funding option that helps buy-to-let landlords "bridge" the gap between transactions. Say you have some debt payments for a purchased property coming up, and you are expecting to sell another property in the near future, which will free up the capital you need to pay your debts.
If the debt due date comes before your capital gets free, a bridging loan can tide you over so that you don’t default on your payments.
Where have the problems been?
The recent increase in the use of bridging loans is likely due to the recent decision by the Bank of England to make the buy-to-let financing rules more stringent. They effectively fixed first-year mortgage rates at 5.5 per cent as a sort of stress test, and also tightened up the rules regarding setting rents in proportion to mortgage costs.
MTF recently reported that around 85 per cent of brokers were having trouble finding the right products for their customers in the buy-to-let market in the last quarter of 2016. Over a quarter of brokers said that not being able to afford loan products was the main reason for this problem. Furthermore, 20 per cent said that recent regulations putting a pinch on the buy-to-let market are the main culprit, and another 20 per cent said that not-so-spotless customer credit scores were getting in the way.
Where do bridging loans come in?
All this means that buy-to-let landlords are in need of quick and simple stopgap measures to be able to make their businesses run. And that’s exactly where bridging loans come in. They are a financial product solution that gives those who use them a good deal of flexibility.
Nearly 70 per cent of participants in the MTF study said that they had turned to bridging loans as the solution when facing problems securing more traditional financial products. About three quarters of participants also said there was a major spike in bridging loans activity in 2016 alone, and many think that this upward trend will continue through the end of this year as well.
Given that they are an exceptionally flexible and versatile type of financial product, brokers report that buy-to-let landlords are using bridging loans for all kinds of things: from auction purchases, to repairs, to relocation of office premises.
In short they have become something of a lifeline for those buy-to-let landlords whom the UK housing crisis and beefed-up regulations have hit the hardest.