Alternative Loans

What other loan options are availiable to landlords other than a BTL mortgage?

I’ve already looked in depth at the subject of BTL Mortgage Finance.  This is the type of funding that landlords typically use to purchase property.  However, from time to time it may be prudent or necessary to use other types of loan.

Bridging Loans

A bridging loan is one that is taken out as a temporary measure as a means of raising finance for a short term (less than 6 months) after which a longer-term arrangement is found.  This could be where a property is being acquired at say an auction, or where it was not possible to secure a mortgage because of the state of the property.  Most typically they are used where an individual is trying to buy another property whilst unable to or waiting to sell their own.

Where they are used, say in between the sale of an existing property and the purchase of another; the loan provider is normally prepared to lend up to 65% of the value of both properties less any mortgage outstanding on existing properties. You can normally borrow between £25,000 & £500,000.

Advantages of a bridging loan

One of the main advantages of a bridging loan over a typical mortgage is the speed in which one can be arranged.  It is normal to have the funds in your hands within a week and if rushed, within a couple of days.  The procedure for securing a bridging loan used to fund the purchase of one property whilst trying to sell an existing will require the borrower to obtain a valuation on the property on which the loan is to be secured on.  In addition, the conveyancer will have to carry out the usual checks on title, but it is important that they can act quickly to ensure the loan advance is not held up.

Disadvantages of a bridging loan

The down-side to a bridging loan is the rate of interest charged is very high.  Interest is charged monthly and is typically of the order of 1.5% per month.  At this rate on a £100000 loan you would be paying £1500 interest per month, much higher than if you had used a mortgage to acquire the property.

In the case of the acquisition of a property at auction it is necessary for the purchaser to complete the purchase within 28 days.  It’s therefore recommended that you use a specialist lender whose main business is to cater for auction purchases.  These lenders are normally ‘non-status’ in the respect that they have no minimum periods or redemption penalties.

Property refurbishment finance

It may be that you have a property already and that you wish to do it up and improve it, but you just done have the finances available.  There are a number of ways of doing this and the best way will depend very much on your personal circumstances.

For most people it’s possible to obtain an unsecured loan.  This loan could be used to finance the refurbishment of a rental property work.  On completion this loan could be repaid, either from the sale of the property or from a remortgage.  This is because the remortgage amount should be higher than any existing loan secured on the property as the value of the property should have gone up as a result of the renovation work.  It should then be possible to repay the unsecured loan out of the proceeds of the new loan.  In this situation make sure that any unsecured loan as well as having a competitive rate of interest doesn’t carry heavy early redemption fees.

Alternatively, where there is a considerable amount of equity in the property, it should be possible to remortgage and release additional funds that can be used to finance the refurbishment work.

Finally, where substantial refurbishment is required, there are a number of specialist lenders that provide mortgages specifically for property’s that need work to make them habitable.

Development finance

Property development has often being a good way of generating great investment properties.  It has always my chosen method of operation.  The Landlords Bible explains in detail how you can use your development skills to maximise the returns on your property investments.  Development finance isn’t cheap and is very much done on a commercial basis, so ensure that where you are thinking of using it there are no cheaper alternatives and that the scheme you are proposing will generate sufficient returns to make it worthwhile.  There are a number of ways that these lenders operate.

Some lenders base their funding on the costs of the scheme.  In this case typically they would be prepared to lend up to 70% of the purchase cost of the land or buildings and then 70% of the costs of development.  The BTL lenders often prefer that the developer’s contribution is front loaded.  This means that the developer invests their capital in the acquisition of the property.  In return the lender funds the development costs.

Some lenders are prepared to lend on the basis of the projected end value of a development.  In this case they would typically lend up to 60% of the projected end value of the scheme.  Where projects are particularly profitable, the result is that a very high proportion of the acquisition and development costs can be advanced against the projected profits.

Some lenders like to take an equity stake in the development rather than lend all the money.  The advantage to the developer here is that finance charges are kept down.  The downside is that they only take a proportion of the final profit.

In all cases lenders will look carefully at a developers track record and experience.  Therefore, where you have not carried out a development before or do not have a relevant background you are likely to pay more for your money and the lenders will advance you less.

The interest rate payable on the loans are normally measured in terms of the London Inter Bank Offer Rate (LIBOR).  Expect to pay between 2-5% above this depending on experience and perceived risk.  The lender is often prepared to ‘roll up’ the interest until the end when it can be repaid as a result of the overall refinancing of the scheme.  Off course you will pay more interest as a result, but this should help your cashflow.  In addition to interest, expect to pay an administration fee of between 1-2% of the initial advance, along with other administration fees as the loan is drawn down and then repaid.

Development loans are not like a standard loan where all that is required is to fill out an application form to secure the monies.  With development finance the lenders require you to carry out a detailed cashflow analysis of the scheme to demonstrate to them that it will be profitable and that you have the ability to deliver a completed scheme.