It is very common now to see our landlord clients acquire property that requires conversion work – either commercial to residential or single dwelling to HMO – or refurbishment and modernisation to get it ‘tenant-ready’.
Beyond maximising rental yields, landlords are adding immediate capital value to their long term investments by completing this work after purchase.
The traditional and well trodden path for landlords through their limited company property vehicles (SPVs) can be broken down into two distinctly separate stages:
§ The purchase and conversion or refurbishment is funded via a Bridging Loan
§ On completion of the works, with the property now in a habitable state for tenants, a Buy To Let mortgage is put in place which refinances the Bridging Loan
Depending on the funds that the landlord has to put into the first stage, some Bridging lenders will only advance a Bridging Loan to acquire the property, while others can offer a ‘Refurbishment Bridge’ which can combine an advance on the purchase with a contribution to the ‘cost of works’ for conversion or refurbishment.
Our well trodden path has two separate conveyance stages, the first of which is when the property is purchased.
The landlord will provide a ‘schedule of works’ to illustrate what will happen once they acquire the property, to be considered alongside the valuation of the property in its current state.
The surveyor provides the Bridging lender and landlord with one valuation of the property in its current state, for purchase, and a second valuation estimating the value of the property with completed conversion or refurbishment work (the ‘Gross Development Value’).
The Bridging lender can then confirm the economic viability of the project, as well as the amount of the ‘cost of works’ that they would be willing to lend, if that was a part of their product.
As the landlord reaches the end of stage one, when the property is habitable by tenants following the completion of the conversion or refurbishment work, they refinance the Bridging Loan with a limited company Buy To Let mortgage.
These products can offer up to 75% LTV (subject to eligibility) and should clear the Bridging Loan plus funds returned towards the original purchase deposit and ‘cost of works’.
At this stage the client has added capital value to their investment, and likely enhanced their rental yield, but the fly in the ointment is that they need to go through a second conveyance stage in full at this point to secure their second and long term finance vehicle – the Buy To Let mortgage.
We recognise that every landlord and client are in a different position, and that having an option on whether to refinance or to sell at the point of completion of the conversion or refurbishment works may suit them.
Many others though are committed from the outset in the long term nature of the investment, and commonly complain about the time and cost of going through essentially a second purchase process on the one property – this represents an opportunity cost to them potentially as well as an additional financial cost.
Product innovation – the single conveyance in a ‘Bridge To Let’
Traditionally commercial finance is not an area associated with lenders adapting and innovating their product offerings based on client requirements and feedback – but the Buy To Let and property investor space is bucking that trend.
Cue the Bridge To Let offering, available now from several lenders and very likely to increase in popularity as landlords become aware of it.
In a nutshell, the landlord completes a single conveyance at the point that they purchase the property – a surveyor’s visit and solicitor’s work confirmed with dual underwritten offers of both the Bridging Loan for the conversion or refurbishment stage, and the subsequent Buy To Let mortgage, which the client rolls into once the works are completed.
The key here is that both finance facilities are arranged with the same lender up front, under a single application and conveyance process.
The lender would confirm completion of works, and the property being habitable for tenants, much in the same way that their agreed QS would sign off works completion during the project for staged payments – critically the completion of the works does not signal a second and separate application and conveyance stage.
§ A single lender providing dual offers at the start of the process – for both the Bridging Loan and the Buy To Let mortgage
§ Significant time saved and reduced costs from not having a second conveyance stage for the Buy To Let mortgage
§ Confidence of knowing your costs, with some lenders able to fix the rate of the Buy To Let mortgage at the initial dual offer stage
‘Time is money’ is particularly true for landlords if that time is between the property being habitable at the end of the completed works, and their longer term finance being in place through the Buy To Let mortgage – that time often being the second conveyance!
We source the most suitable solutions for our clients’ requirements from our whole of market panel of lenders. By listening to the whole set of requirements we can identify the most suitable solution for our landlords – which could include Bridge To Let moving forward.
Mark Grant, April 2021.
info@fiduciacommercialsolutions.co.uk / 01636 614 014
