Short Term Loans (STL) are also known as bridging loans. They are secured, usually on a residential or commercial property. However, some property investors are wary of them and have misconceptions about what they are and how they should be used. Here, we unpack the top three Short Term Loan myths we regularly hear from property investors.
Myth 1: I don’t need a short-term loan, I can just use a buy-to-let mortgage while I do refurbishment works on my property.
Some investors obtain a term facility in the form of a buy-to-let (BTL) mortgage, carry out refurbishment/conversion works, pay the early repayment charge, and then get a new mortgage. However, this is not what BTL mortgages are for. Moreover, acting this way is committing mortgage fraud.
Lenders do not like it when you suddenly change anything relating to the terms of the mortgage, and using a buy-to-let mortgage to do works, changes the terms. A BTL mortgage is created on the basis that it is being let from day one with rent to cover the monthly repayment. If you do not rent it out and therefore do not have rental income to cover the monthly repayment, you are already changing the terms of the loan. Then, if you also carry out conversion or refurbishment works, this will also change the value/type of the bank’s security – i.e. the property.
You might get away with it once or twice, but sooner or later, you will get caught, and there are significant penalties for mortgage fraud. Furthermore, this is not the way to build a long-term relationship with a lender or a sustainable way to grow a property portfolio.
We work with lenders who will provide investors with a short-term loan to purchase a property and undertake refurbishment, and then follow on with a term facility once works are complete and the property is ready to rent normally at a higher valuation figure. An investor, therefore, has the potential to build a strong relationship with a lender over time and multiple loans. But only if they use short-term loans and BTL mortgages in the right way.
Myth 2: Short-term loans are too expensive.
Short-term loans have higher interest rates than longer-term mortgages, but they are also only intended to be used for 1-24 months. They offer quick finance for specific purposes. Short-term loans are used when the property is not generating any rental income. If the property is not generating rental income, you will not be able to get a longer-term BTL facility. STLs provide a range of benefits when used correctly.
The benefits of short-term loans and bridging loans include:
- Speed of completion for auction purchases
- 1st or 2nd charge mortgage
- Periods as short as 1 month
- Periods up to 2 years
- No early repayment charges (ERCs) on certain products
- The ability to carry out work to increase the property’s value
- Purchasing properties in an un-mortgagable condition.
Myth 3: Short-term loans are a last resort and are only used by people who have not managed to get other finance in place.
For property investors, short-term loans can be part of well-planned portfolio growth in several ways. Typical uses of short term and bridging loans include:
- Buying a property at auction
- Refurbishing a residential or business property
- Covering a gap in a broken property purchase chain
If you take out a buy-to-let mortgage and you proceed to carry out improvements or refurbishments to the property used as security there will be negative consequences. You will not only incur early repayment charges if you wish to sell or refinance to take advantage of the higher property value, but you would also be breaking the contract between you as the borrower and the lender – which is mortgage fraud.
If you plan to use a short-term loan to purchase a property at auction, or to refurbish a property, this is a sign of good financial planning, and an understanding of the appropriate loan type, not a last-minute decision.