New buy-to-let rules could result in more bridging loans

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The Prudential Regulation Authority (PRA) has introduced new commercial mortgage affordability guidelines that can delay the mortgage application process, says a February 2017 article. Bridging loans could increasingly be used to complete buy-to-let property purchases.

New affordability guidelines mean that mortgage lenders require rental levels to be at least 125-145% of the mortgage payments, even if interest rates rise. Though not every lender is governed by the PRA guidelines, in practice most lenders have changed their lending procedures in line with the authority’s recommendations. Some lenders will apply less strict conditions for mortgage applications from limited companies.

The Financial Conduct Authority (FCA) agrees with the PRA guidelines and has encouraged all mortgage lenders to adopt them.

While many landlords can comply with affordability tests, according to mortgage expert Nick Jones, lenders may now take longer to assess buy-to-let mortgage applications.

If a landlord finds property competitively prices, he or she needs to be able to complete the purchase quickly, otherwise the property could be sold to another buyer. There may not be adequate time to secure a mortgage, but to solve this issue, short-term bridging loans can be used to complete the house purchase. The bridging loan can then be repaid once the mortgage funds become available.

To use a bridging loan requires an exit strategy, which is when and how the bridging loan will be repaid. A borrower needs to be confident that they can pass all the stress and affordability tests required for a commercial mortgage that can repay the bridging loan.

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