If you aim to buy a house you can later sell for profit, a buy to sell mortgage could be a good fit for you. These mortgage types are often the right option for taking on a renovation project.
What is a buy to sell mortgage?
A buy to sell mortgage is often called a ‘bridging loan‘. It is a short-term finance arrangement designed to be used for purchasing a property that you intend to sell for profit. In this way, it is different from a mortgage for buying a second home, or a BTL (buy to let) mortgage. The sale is usually made after renovating the property. With standard mortgages, the contract terms are usually longer than you would need to quickly sell a property. Buy to sell mortgages are usually paid back in months rather than years.
Who would a buy to sell mortgage be suitable for?
Many investors have a background in building capital by purchasing property and selling for profit. This type of investor will have a finger on the pulse of the property market, looking out for houses that are selling BMV (below market value) and have good potential. Often, a person selling BMV will be after a quick sale. One of the common reasons for this is that someone has inherited a property from a relative who has passed away. When someone is highly motivated to sell, they are often more open to selling below the market value.
If you are willing to undertake detailed planning and comprehensive research, and you have the capital to pay for the renovation, a buy to sell property can be an excellent investment.
Things to consider with buy to sell mortgages (bridging loans)
In order to be considered for a buy to sell mortgage, you will need to have more cash available than with other mortgage types.
First of all, you will usually be required to put down a significantly larger deposit than with other mortgages. Expect to put forward a minimum of 20-25%. Additionally, buy to sell mortgages come with a higher interest rate. This is because the property is likely to be uninhabitable throughout the process of renovating.
You should be aware that renovation costs frequently amount to more than anticipated. It is advisable to build a contingency of 15% or more when setting your renovation budget.
If your credit history is not good, you may find it more difficult to secure a mortgage for a buy to sell property. This is true of owning a second property of any type.
Mainstream vs. specialist mortgages
Choosing the right mortgage products depends largely on your circumstances. The most important consideration is how quickly you aim to buy and sell a property. If your target is to achieve a turnaround of a few months, you may need to seek out a more complex product than most mainstream lenders can offer. If, however, you aren’t planning such a fast turnaround, or you would like to live in the property or rent it out, a more standard mortgage product could be a good fit.
Another important factor to consider is the amount of work that needs to be done on the property. If a house has been deemed uninhabitable, the amount of work needed will be extensive. In this case, a specialist mortgage is probably a better option.
Mainstream lenders usually prefer to take on simpler mortgage cases. This way, they can keep their products and fees more consistent and manageable. It works for them, but it means they are often unable to accommodate more complex cases. Specialist lenders are here to plug this hole, and although they are often less well-known, they are no less legitimate or reputable than those better-known mainstream lenders.
Bridging loan, buy-to-let or residential mortgage?
This type of mortgage is ideal for situations where the price a property is on the market at is significantly lower than its potential value. Many houses bought at auction, or those that need a lot of renovation work, are often prime examples of this. A residential mortgage is based on the purchase price, which can restrict the rate. A bridging loan, on the other hand, will consider a property’s potential value.
Bridging loans are designed to enable you to raise the capital you need in days, rather than weeks, so that you can seize an opportunity to buy quickly. In the case of residential mortgages, lenders often need to perform their own valuation of the property, which can cause further delays that often runs into several weeks.
With a bridging loan, you may only need to capital for a few months. It is repaid either upon selling the property or by a residential mortgage upon making the property habitable once again.
Many people who take out a bridging loan have an exit plan prepared. They know the projected timespan of their project, so they know when they will be able to sell or get a residential mortgage on the property. Closed bridging loans have a predetermined end time, while others are more open-ended and flexible.
As they are more versatile, bridging loans usually have a higher interest rate than BTL or residential mortgages, though it will be paid over a much shorter period.
Buy-to-let (BTL) mortgages
A Buy-to-Let mortgage is a good choice for investors who want a quick purchase but don’t plan to live in the property themselves. The property in question must be habitable but, unlike with a residential mortgage, you will not be living in the property once the purchase is complete. With a Buy-to-Let mortgage, the interest rate will be lower than with a bridging product, but you will have less flexibility and it can be expensive to set up and exit from. Early repayment charges (ERCs) mean they aren’t usually viable for getting out of quickly, so you should consider your plans carefully, particularly if you plan on selling the property in the near future.
When you need to buy quickly, some residential mortgage options can be worth considering. If the property is habitable, and you plan to live there when the purchase is completed, a residential mortgage might be suitable. The benefit of a residential mortgage is that lenders can provide a decision in principle. This gives you a good idea of what you can afford if you plan to buy at auction. For properties that aren’t immediately habitable, a specialist mortgage like a bridging loan is likely to be a better choice. And if you aren’t moving in, a buy to let mortgage could be the right choice. Again, a key consideration is how quickly you wish to sell.
How do I apply for a buy to sell mortgage?
Buy to sell mortgages are not your only option and they won’t be the best one for everyone. There will be some situations where a different approach offers better value, such as taking out a bridging loan. It all depends on your individual circumstances, but a buy to sell mortgage offers significant advantages that will be attractive to a lot of people.
If you’re planning to purchase a property in order to renovate and resell it, we recommend that you contact Think Plutus and speak to an independent, expert mortgage adviser. We will be able to look at your situation and tell you whether a buy to sell mortgage is the right way to go, then guide you through the application process to maximise your chances of success.