What is a buy to sell mortgage?
A buy to sell mortgage – sometimes referred to as a bridging loan – is the short-term finance arrangement for purchasing a property with the intention to sell it, rather than buying as a second home or BTL (buy to let). This is usually done once renovation work is complete. Often standard mortgages have longer contract terms than what is necessary for a buy to sell property. In comparison, buy to sell mortgage loans are typically paid back within months rather than years.
Who might require a buy to sell mortgage?
There are many investors who have experience building capital from buying and selling houses. Usually, they will be monitoring the marketplace to find houses that are BMV (below market value) with good potential. Generally, sellers of these types of properties will want a quick sale. This is regularly the case when a person has inherited a property following a relative passing away. In these instances, sellers can be more willing to sell below the market value.
As long as you plan well, do your research and have the money to invest in the renovation then buy to sell properties can be good investments.
Buy to sell mortgage (bridging loan) considerations
A buy to sell mortgage will require you to have more available cash than most other mortgage types.
You will usually need to be able to put down a larger deposit in comparison to other mortgage types. This is typically a minimum of 20-25%. Buy to sell mortgages also have higher rates of interest. This is because the house is likely to uninhabitable for a period of time while the renovation takes place.
In addition to this, renovation costs will typically cost more than you initially anticipate. With this in mind, when setting your budget it’s advisable to build a contingency of at least 15%.
If you have a history of bad credit, then you might find it more difficult to get a mortgage for a buy to sell property as with owning any type of second property.
Mainstream or specialist mortgages?
Knowing what mortgage product is best depends on your situation. More specifically, how quickly you want to buy and sell a property. If you’re looking for a turnaround within a matter of months, a more complex product may be required than mainstream lenders can provide. If you’re not looking to ‘flip’ a house as quickly or perhaps intend to live in the property or rent it out, a standard mortgage may work for you.
In addition, the level of work required to the property may dictate the type of mortgage product required. If a house is deemed inhabitable, or in need of extensive work, a specialist mortgage is more likely to be required.
High street or mainstream lenders tend to stick to simpler mortgage cases. This allows them to keep their products and fees more rigid and manageable, but doesn’t cater for more complex cases. This is where specialist lenders can help. They may be less well known, but are certainly no less reputable than more well-known lenders.
Bridging loans, residential mortgages or buy-to-let?
A bridging loan is perfect for when the purchase price of the property is significantly less than the potential value. Houses bought at auction, or that need extensive renovations are often considerably cheaper than usual residential purchases. Where a residential mortgage is based on the purchase price and can, therefore, restrict the rate, a bridging loan will consider the potential value of the property.
Bridging loans allow you to raise capital in days, rather than weeks, helping you snap up a property quickly. With a residential mortgage the lender may need to value the property in question, resulting in further delays which can take weeks.
A bridging loan is often only required for only a few months. It’s repaid either on sale of the property, or by a residential mortgage when the property becomes habitable.
Many users of bridging loans have an exit plan in place. They know how long their project will last and when they will be able to either sell or have a residential mortgage on the property. Some bridging loans are closed, with a set time to end. Others offer more flexibility and are open-ended.
Due to their flexible nature, bridging loans typically carry higher interest rates than residential or BTL mortgages, albeit over a far lower period.
When looking to buy a property quickly, there are instances where residential mortgages may be a viable option. Provided the property is habitable and you will live there on completion, a residential mortgage could work. The value of a residential mortgage is that lenders will give you a decision in principle. This lets you know exactly what you’re able to afford if you find yourself at auction. If the property isn’t habitable, a specialist mortgage or bridging loan is more likely to be relevant. If you aren’t to be moving in, you may need a buy to let mortgage.
It depends on how quickly you wish to sell. Residential mortgages carry lower interest rates than bridging products but are far less flexible and expensive to setup and exit from. Early repayment charges (ERCs) often make them unsuitable for getting out of quickly or cheaply.
Buy to let mortgages
Buy to let (BTL) mortgages are suitable for investors looking to buy a property quickly, without planning on living in the property themselves. Similar to a residential mortgage, the property needs to be habitable. The only difference is that it is not you living in the property upon completion. The same issues apply with regards to entry and exit fees or restrictions. These may bring into question how appropriate this type of mortgage is. It again depends on your intentions, and how quickly you intend on buying and selling.
Why Clever Mortgages?
At Clever Mortgages we can offer you the support and advice required to ensure you get the right mortgage for your first home. We provide access to a comprehensive range of mortgages from across the market. We are also authorised and regulated by the Financial Conduct Authority (FCA) and adhere to the Treating Customers Fairly (TCF) guidelines, so you can be confident that we will treat you with integrity and only recommend products that meet your needs.
A fixed rate mortgage is where your interest rate stays the same for a set time period (usually between 2-10 years). As a result your repayments are exactly the same each month, regardless of what happens to other mortgage rates. These types of mortgages are popular with first time buyers and people looking to budget each month, especially those who have suffered from a poor credit history.
The main downside to a fixed rate mortgage is that if mortgage rates go down you can be paying a higher amount than you would on a variable rate mortgage. However, this can also go in your favour and if interest rates increase you can be paying less than you would on a variable rate.
Every lender will have their own standard variable rate (SVR), which is considered their basic mortgage. This interest rate goes up and down, usually in line with the Bank of England’s interest rates but the lender is free to raise this at any time.
This means that your monthly payments can go up or down depending on what the interest rate is at a given time. Some months you could be paying more whilst other months you could be paying much less.
A discount mortgage is when a reduction is applied to the lenders Standard Variable Rate (SVR) for a certain length of time (typically 2-3 years). Discount mortgages are attractive as they can allow you to pay slightly less than the bank's standard rate. However as the SVR can still fluctuate they are not ideal for people who are looking to stick to a strict long term budget.
A tracker mortgage is basically a type of variable rate mortgage. What makes them different from other variable rate mortgages is that they follow – track – movements of another rate, the most common rate that is tracked is the Bank of England Base Rate.
A capped mortgage is the same as a variable rate mortgage; however the interest rate can never rise above a set “cap”. These mortgages can work well for people who can budget for different mortgage repayments each month but want the reassurance that their payments will never go above a certain amount.
Offset mortgages are linked to a savings account as well as your current account. Your savings will be 'offset' against the value of your mortgage, and you'll only pay interest on your mortgage balance minus your savings balance. These types of mortgages work well for higher earners or people who have a good amount in savings that they want to use towards paying their mortgage.