Using bridging to help BTL investors grow their portfolios
Looking back on the year, it’s hard to avoid the conclusion that things are tougher all around for everyone. The most recent Bank of England Monetary Policy Committee meeting saw yet another hike in rates, this time to 3.0%. Okay, so that’s not particularly high for those of us with 20+ years of memories, but it certainly is for those who’ve only been borrowing since the credit crunch. And when you consider that the Bank Rate was just 0.1% 13 months ago, that’s a large increase that borrowers on variable or tracker rates have had to shoulder in a relatively short period of time.
Unsurprisingly, we’ve witnessed a slowing down of the property market during 2022 as well. Halifax has reported that average house prices fell in November, with a monthly drop of -2.3% the largest seen since October 2008 and the third consecutive monthly fall. Meanwhile, the latest UK Residential Survey from RICS, covering November 2022, found that overall activity continues to weaken across the sales market, with higher interest rates and a difficult macroeconomic outlook both affecting on buyer sentiment. Then there’s rising demand and falling supply which are sending rental prices upwards. This final point should be good news for landlords. In addition, reduced competition amongst buyers presents opportunities for investors to grow their portfolios. Furthermore, the London newspaper for the Square Mile, City A.M., reported at the beginning of December that the number of landlords looking to exit the market has reached a 13-year high, citing the reduction in Capital Gains Allowance announced by Chancellor Jeremy Hunt in the recent Autumn statement. He announced that the amount one can make from the sale of certain assets before paying tax will fall from £12,300 to £6,000 in April and then to £3,000 in April 2024. One estate agent told City A.M. that the number of landlords looking to sell are up nearly 65% in November compared to October and nearly 300% compared to November 2021.
This, of course, presents opportunities for those landlords who take a long-term view regarding their investment. The short-term outlook for property prices may be challenging, but the long-term fundamentals of demand for housing exceed supply remain. A slowing property market and falling prices give investors the chance to grow their portfolio now, with a view to longer-term gains. And they can do this with confidence that demand for rental property is strong and growing, with rents increasing.
However, like residential mortgages, buy-to-let rates have increased significantly in recent months. As such, some landlords may wary about committing to a mortgage at higher rates at this time. In addition, higher stress tests are making it difficult for investors to secure leverage from a buy-to-let mortgage.
This is where bridging finance can work for landlords. Unlike buy-to-let, there is not the same approach to stress testing with bridging. This is because lenders are most concerned by the exit strategy: how is the borrower going to refinance and get out of the short-term financing arrangement?
Of course, if the exit strategy involves moving onto a buy-to-let mortgage then the focus on stress testing will remain; but if the bridging finance has been used to increase the rental and/or capital value of the property - perhaps by improving the Energy Performance Certificate (EPC) rating – then this will work favorably in any stress test. Alternatively, a conversion into separate units or the creation of an HMO could increase the value of the rental property.
Investors can therefore use bridging finance to fund the purchase of properties, with a view to refinancing in the future when rates have settled. I’ve written this year on the importance of having multiple exit strategies (a Plan A and Plan B, and even Plan C) in order to demonstrate to a lender that the applicant is realistic about the current market. For example, investors should consider alternative options for refinancing in future, such as refinancing across multiple assets.
The rental market fundamentals remain strong: prospective first-time buyers are struggling with affordability, especially with the recent interest rate hikes. At London Credit, we have the appetite, funding and can be trusted to deliver. We’re working with brokers every day to help their landlord clients use bridging to expand their portfolios when buy-to-let mortgages can’t.
Marios Theophanous is credit manager at London Credit