Landlords need a range of finance options to manage a successful property portfolio, whether they are buying a property, refurbishing a property, or both. The main finance options include mortgages, second charge loans, bridging loans, personal loans and credit cards. Which finance option is best for landlords? Well, that depends on what the landlord wants to achieve.
As for any business or individual, a mortgage is the main finance option for landlords buying properties to rent out. But if the property purchase needs to be completed quickly or it is dependent of the sale of another property which is not going to be completed in time, or the landlord has bought a property through an auction house and needs to pay for it within 28 days, then bridging finance is a fast and straightforward way to raise funds quickly until the mortgage can be put in place. Importantly the use of a bridging loan means the landlord can act swiftly and avoid losing out on a property deal. It also means that any refurbishments can be started sooner, before the mortgage is in place, rather than later enabling landlords to move tenants in as quickly as possible.
Remortgaging properties periodically means that landlords can take advantage of lower interest rates. If landlords have multiple properties, then they can potentially spread the equity in the properties across their property portfolio, so that they can maximise the loan to value of each property in the likely event they need to borrow again in the future.
Landlords may want or need to make large-scale refurbishments to their properties and add features such as an extra bathroom to attract higher rents. Landlords are also responsible for keeping their properties in good repair to meet health and safety standards.
According to InterBay Commercial, in their report ‘Unlocking value: The role of refurbishment in buy to let’, not all landlords are aware of the different financing options available. Many of them take out personal loans or use their credit cards to finance refurbishments. But other finance options for landlords mean they could finance the refurbishments by borrowing against their properties instead.
Landlords could refinance the mortgage to take advantage of lower interest rates as well as raise finance for the cost of the refurbishments, or they could take out a second charge mortgage to finance the refurbishments only. However, mortgage applications are a time-consuming process and while it means they can spread the cost over the long term, and landlords have to start making loan repayments straight away before they can benefit from increased rents. A fast and flexible way to finance refurbishments is to take out a bridging loan. The application process is short, and the funds can be paid out quickly, often within 2 weeks. There are no monthly payments and the loan plus the interest is paid in full at the end of the loan. There is also the option to pay the bridging loan off early without incurring any exit fee.