Buy to Sell Mortgage Options
There are three main ways to finance a property purchase for a quick turnaround.
1. Buy to Sell Financing
The first option is to use buy to sell financing. This is short-term lending for investors looking to turn around a property in less than 12 months. The deposit is usually around 20-25%, and the associated fees are typically somewhere around 2% of the loan. Interest is also higher, sitting at about 0.7-1.5%.
2. Flexible Buy-to-Let Mortgages
Some buy-to-let mortgages have no repayment charges, making them more flexible and a viable option for a short-term mortgage requirement. To qualify for this sort of mortgage, the property will usually have to be considered habitable, and so have essentials such as a bathroom and kitchen. The deposit on this type of lending is also around 20-25%, and the most competitive lending is available to experienced landlords.
3. Flexible Residential Mortgages
The third option is to find a flexible residential mortgage that will allow you to live in the property while it is renovated. The deposit value is lower and can be as little as 5-10% depending on your circumstances. To qualify, you'll need to be buying a habitable property, and will need to secure a mortgage which does not restrict you from selling the property on or charging early repayment fees once the refurbishment is completed.
Mortgaging a Fast Purchase Turnaround
If you are looking to by a repossessed property, or purchase a residence at auction, you will need a fast turnaround time on your mortgage application. Many property developers follow this business model and buy a low-value property, renovate it over a few months, and sell it on at a profit.
Finding fast financing is essential in this sort of deal. For example, if you purchase a property at auction, you will usually have to come up with the funds within 28 days.
The offer you have made is not considered final until contracts are exchanged, so there is a risk of losing out on the property if the financing is not available quickly enough.
Auction purchases usually carry a deposit of around 10% as an upfront payment, which can be lost if the sale falls through, which means having the funds available before you bid is much safer.
Residential Mortgages for Property Redevelopments
As residential mortgages evolve, it is less likely that this will be a viable option. Many lenders now include early repayment charges within their standard terms, meaning it would cost significantly more to use a residential mortgage to purchase a property you intend to resell.
Buy to sell is a specialist mortgage area. As loopholes in residential mortgages are closed, this type of funding is usually best suited to valid residential purchases, rather than for buy to sell properties.
However, there are still flexible mortgage options available. Choosing the right lender is essential to ensure you secure the most competitive rates and secure lending that can be repaid within the timeframe you have in mind for your resale.
One of the easiest ways to purchase at auction is to have an agreement in principle (AIP), which means that if your bid wins at auction, you are ready to proceed with the lending. This can also act as verification that your bid is authentic.
When purchasing a habitable residential property that needs renovation, using a standard mortgage is an option if you plan to live in the property yourself while the refurbishment is carried out. Usually, the deposits required and rates available on residential mortgages are lower than any other type of property financing, meaning it is attractive from a cost perspective.
If you do not intend to live in the property or the premises are not habitable, a residential mortgage is unlikely to be the best option.
Buy to Let Mortgages for Buy to Sell Properties
Another route to finance a buy to sell property is to use a buy to let product. Mortgage lenders may be willing to lend whether or not prospective tenants are ready to move in, and often a short-term financing option such as bridging finance can cover the cost in the interim.
If you plan to renovate the property and then let it out, then a buy to let mortgage is probably the best solution. This also depends on whether the property is habitable, in which case a buy to let mortgage may be the cheapest option.
Bear in mind that buy to let mortgage lenders may be reluctant to lend against an uninhabitable property needing extensive renovation before it can be let out.
In this scenario, there are specialist lenders who offer renovation financing, or short-term lending, which means that you can comfortably finance the property purchase and the works required. Once the property is ready to let, the financing can be replaced with a standard buy to let mortgage.
This often works well, provided the value of the property on completion, including the cost of the work, is higher than the original cost value. In this scenario, the remortgage will pay back the short-term finance, while also recognising the equity now held in the higher value refurbished premises.
Auction and Bridging Finance for Property Purchases
When you purchase a property and apply for a mortgage, the lender will always need to consider the value at which you are buying. This means that even if you are purchasing a property at auction for £80,000, knowing that in the marketplace the premises will increase in value to £100,000 with a little work, the lender won't be able to consider this anticipated value.
They will only be able to calculate against the £80,000 sale price, and won't be able to lend against the potential market value.
This means that it can be challenging to cover the cosy of a property purchase and renovation with any kind of standard mortgage product.
Specialist bridging and auction finance are targeted to this area of business, and as such, the lenders in the sector are more flexible in how they consider the amount of lending they can offer.
Both auction and bridging finance are short-term loans, usually with an interest rate far higher than you would expect to pay on a residential mortgage at around 1-3% per month.
As such, it is essential to know when the lending will be repaid, and how - whether by reselling the property at a profit, or remortgaging to retain as an investment property.
Most short-term financing applications can be completed within a few days, so are significantly faster than a typical mortgage application. This makes it ideal for auction purchases, where time is of the essence.
Closed bridging finance is where you agree with the lender when the loan will be repaid, and what your exit strategy is. Open bridging financing has a more flexible period, and is best suited to refurbishment projects where you cannot be sure when the property will be ready to sell or remortgage.