Property professionals have had to deal with a host of government and regulatory changes over the last couple of years which have made life rather trickier for them, from the implementation of the higher Stamp Duty rate to the withdrawal of mortgage interest tax relief. But one of the most significant has been the new underwriting requirements on buy-to-let mortgages from the Prudential Regulation Authority.
These new rules have resulted in many buy-to-let lenders requiring much more significant interest rental coverage, often looking for as high as 145%. That has made it extremely difficult for some borrowers to raise finance against a low-yielding property, whether to buy that property in the first place or to help fund the purchase of another rental property.
This is unfortunate – just because a property delivers a low yield, doesn’t necessarily make it a poor investment. For example, in the last LendInvest Buy-to-Let Index we found that Southampton offered an average yield of 4.08% – significantly lower than landlords can enjoy in other areas of the UK. Yet it has seen solid capital price growth at 5.47%, its excellent transport links into the capital regularly see it named as a future house price hotspot, while the presence of two large universities boost its appeal to landlords.
Innovating to meet demand
We know from countless conversations with our borrowers that there is significant demand for a way to borrow against properties like this, whether to purchase the property in the first place or to fund a purchase of another property. That’s why we have launched our new three-year bridge product. This isn’t a buy-to-let deal, and won’t be underwritten as such. Instead, it serves as a useful alternative for brokers and their clients to consider when the sums of a traditional buy-to-let mortgage do not quite add up.
It’s another example of how bridging loans are becoming ever more useful to investors, for a range of different purposes. The days of dismissing bridging loans as an expensive last resort are thankfully now long behind us. Instead a host of intermediaries and borrowers are clear on the many different ways they can support investors with their projects.
This has been reflected in the range of targeted bridging loans launched across the market which have been specifically designed for different uses. At LendInvest for example we have built dedicated auction finance, development exit finance, pre-construction loans and refurbishment finance in recent months, on top of the three-year bridge.
It’s important for all lenders to continue to identify specific areas where a form of bridging loan can provide badly needed support for investors, and then tweak the design of that loan to accurately meet that need. It’s not enough to expect borrowers to bend to meet the lender’s requirements of a single, one-size-fits-all bridging loan.