Landlords seek new ways to finance buy-to-lets

February 2, 2017

Posted by Sarah Marshall

Tighter borrowing rules and affordability tests for buy-to-let financing introduced by the Bank of England have led to landlords finding other means of investing in this sector. A survey by bridging loan lender MTF has revealed that 84 per cent of brokers asked could not source a buy-to-let mortgage for some clients in the last three months of 2016. Of these, 27 per cent said affordability was the main obstacle. However, the same poll showed that demand for bridging loans has soared. These are designed to be short-term, secured loans which bridge a temporary shortfall of cash when buying property. The study found 69 per cent of brokers who could not get a buy-to-let mortgage for their clients decided on bridging loans. About one-third of brokers noticed a rise in the number of such loans in the fourth quarter of last year, with an increase of 13 per cent compared to the third quarter.

Bridging is a quick way to borrow money in the short term and can be used for a variety of reasons. In the survey, borrowers had different reasons for securing bridging finance, with 31 per cent needing funds to refurbish property, while a further 15 per cent wanted to carry out development projects. Demand for bridging loans is expected to remain high in 2017.

Bridging finance is proving more popular for businesses in the UK across the board, not just in the property sector. In 2011, about £750 million was borrowed by this means, but last year, the amount had risen to £4 billion. This growth is partly because of stricter criteria by the leading banks, but also the launch of new bridging lenders who have made it a more competitive market. The amount you can borrow is usually anything from £25,000 to £25 million for around three to 12 months. The most common reason for taking out a loan is property development, either a refurbishment for a buy-to-let or to sell at a better price.

There are other alternatives to borrowing from the banks, with property crowdfunding seeing a huge surge over the past 12 months. The UK Crowdfunding Association has reported a growth in the number of platforms offering specialist crowdfunding opportunities in property. By pooling resources, investors can increase their buying ability, while reducing costs and sharing the risk. Investors can enjoy regular dividends as well as benefiting from rising prices when they decide to sell. An article in The Telegraph showed returns from property crowdfunding can vary from three per cent to 12 per cent. Forecasts by The Office for Budget Responsibility expects house prices to grow by 11 per cent between April 2016 and March 2018 while the Royal Institute of Chartered Surveyors forecasts that property values and rents could rise by three per cent, as demand continues to outstrip supply in 2017. Figures from the Office for National Statistics also show annual growth was 6.7 per cent in the year to November, with the most rapid growth being in London and the east of England. So, despite tax changes for landlords, the buy-to-let market is expected to remain a solid investment.