Buy-to-sell mortgages may be a great financing option if you intend to purchase a property and sell it later for a profit (also known as flipping houses!).
A buy-to-sell mortgage is commonly used to take on a renovation project and cover the costs of the work.
Think Plutus explains how buy-to-sell mortgages work, alternative options, and the types of property transactions best suited to this rather specialist mortgage product.
What Is a Buy-to-Sell Mortgage?
Commonly referred to as a bridging loan, a buy-to-sell mortgage is a short-term finance arrangement designed to cover the cost of investing in a property that you expect to sell at a higher value than you have paid.
These mortgages differ from borrowing products used to purchase a second home or a buy-to-let mortgage (BTL) because they provide a shorter repayment period and much greater flexibility in what you can borrow.
In most cases, the property is purchased, renovated or redecorated and sold when the project is complete, and the market value has increased.
A standard residential or second home mortgage usually has contractual terms up to around 25 years, whereas you should expect to repay a buy-to-sell mortgage in months rather than years.
Who Can Apply for a Buy-to-Sell Mortgage?
Property investors may be familiar with the business concept of investing in property and selling it at a profit and will normally have their fingers tightly on the pulse of the market.
They will usually target houses listed below market value, with strong potential to deliver a favourable return. Some of the typical scenarios where a property will be listed at a good value include:
- A home in probate or that has been inherited.
- Where the current owner needs to achieve a quick sale.
- Repossessed properties.
- Renovation projects that the owner does not have the finances to complete.
This list is not exhaustive but indicates some situations where a motivated buyer will prioritise speed over price and may be willing to accept a lower sale value to complete the transaction as quickly as possible.
The reality is that a successful buy-to-sell investor will usually conduct comprehensive research and detailed planning rather than taking a chance on a property that appears to be of very good value.
Renovations require a capital investment and a detailed understanding of the realistic future sale price to ensure that a buy-to-sell property will comfortably achieve a profitable resale.
What to Consider When Applying for a Buy-to-Sell Mortgage / Bridging Loan
Buy-to-sell lenders will require a greater cash down payment than for another more conventional mortgage.
Although exact terms vary between lenders, you will normally need to offer a minimum deposit of at least 25% to 30% and accept a higher interest rate on the shorter-term mortgage period.
Since the property will probably be uninhabitable during the renovation, this presents a slightly higher lender risk profile; hence the higher associated fees and interest charges.
It is also vital to appreciate that renovations frequently cost more than expected. A contingency budget of 15% or more is advisable to ensure you do not end up making a loss or not being able to finance the end of the work.
Buy-to-sell investors with a poor credit history may find it more difficult to secure a mortgage for this type of property, which applies to any second property mortgage.
Mainstream vs Specialist Buy-to-Sell Lenders
As with all mortgage products, numerous options are available, and the right product and lender will very much depend on your circumstances.
The best way to assess which buy-to-sell mortgage to apply for is to work through your expectations, such as:
- Timeframe: how quickly do you intend to buy, renovate and resell the property? A short turnaround speed may require a niche lender, whereas a project scheduled over a few months or where you plan to live in or let out the property could be compatible with a more mainstream mortgage.
- Required works: if the property is currently uninhabitable or even derelict, the renovation could be an extensive project to take on. Specialist lenders are usually more suitable for large-scale property renovations.
While a mainstream lender might be appropriate, they prefer simpler mortgage applications without too many unknown factors to present to their underwriters.
Complex buy-to-sell arrangements are less attractive because the time and costs associated are not normally consistent with their product lending policies or fee structures.
Specialist buy-to-sell lenders plug the gap. Although these mortgage providers are less well known, they are legitimate and reputable lenders with the ability to assess each application case-by-case.
Should I Apply for a Bridging Loan, Buy-to-Let or Residential Mortgage?
There are circumstances where a buy-to-sell project is eligible for several different mortgage types, depending on what you plan to do with the property during and after the renovation.
Next, we will run through the pros and cons of each and explain when they are the best option.
A bridging loan is ideal when the property listing price is significantly lower than the potential resale value.
Properties purchased at auction or needing extensive renovations are often good examples!
Residential mortgages are assessed on the purchase value, limiting the mortgage borrowing available. Bridging loans, conversely, are based on the potential property value, which gives you greater scope to borrow more.
Bridging finance enables applicants to raise capital in days, allowing you to move forward quickly rather than waiting for weeks.
Because a residential mortgage requires in-depth underwriting and a affordability assessment, the turnaround time does not tend to be particularly fast, which might lead to further delays or loss of the opportunity to invest altogether.
A bridging loan provides capital for only 12 to 18 months. You will need to present an exit strategy to demonstrate how you expect to repay the debt – normally by selling the property or remortgaging onto a residential product.
Therefore, before applying, you will need a definitive project time span. However, you can opt for an open-ended, more flexible bridging loan rather than a closed bridge with a predetermined end date.
The versatility of bridging loans commands a higher interest rate than a residential or buy-to-let mortgage, although the debt is repaid over a shorter period.
Buy-to-let (BTL) mortgages are better for investors who want to complete the purchase quickly but do not intend to live in the property themselves.
Eligible properties must be habitable, but interest rates are lower than with a bridging loan. The downside is that a BTL mortgage is not as flexible and can carry higher arrangement fees and exit charges.
Early repayment charges (ERCs) can make it unviable to repay a BTL mortgage before the end of the term, so it is important to plan carefully, especially if you expect to sell the property fairly soon.
There are residential mortgage options that we can arrange reasonably quickly if you have an investment opportunity to buy a habitable property you intend to live in.
Residential mortgages can be advantageous because the lender will often provide a decision in principle, which means you get a good idea about what you can afford to bid for a property in an upcoming auction.
If the property is uninhabitable in its current condition, you will need a more specialist mortgage such as a bridging loan or a self build mortgage.
In any of these mortgage product choices, the key is determining how long you expect to hold onto the property and how fast you intend to sell.
How Do I Apply for a Buy-to-Sell Mortgage?
Buy-to-sell mortgages are one of several options, and while they might be the right choice, they are not suitable for every property investor.
There are situations where you can achieve better value with a different approach; so much depends on your circumstances.
Still, a buy-to-sell mortgage can be beneficial and provide a solution where other more conventional mortgage products are unsuitable.
If you plan to buy a property to renovate and resell, please contact Think Plutus at your convenience for further guidance on the right mortgage products for your project.
As an independent, private mortgage adviser, we can assess the situation and ensure you make the right choices, with full support throughout the application process to maximise your mortgage approval prospects.