If you want to buy a property and then sell it relatively soon after, you might already know that typically, most residential mortgage lenders won’t provide loans for property purchases of this kind.
Niche lenders that offer more flexibility will though.
This guide tells you how to find those lenders but first, it gives you a list of the pros and cons of buy to sell mortgages, that each need to be carefully considered.
Who would benefit from a buy to sell mortgage?
Buy to sell mortgages aren’t exclusively taken out by property investors but these types of products are very popular with people building property portfolios and snapping up potential profit makers at auction.
People that have recently inherited property that needs doing up can also benefit from the flexibility that a buy to sell mortgage provides because the short mortgage term gives a window of opportunity to renovate and then sell the property for a profit. This is known as “flipping”.
What is a buy to sell mortgage?
Some people prefer the short-term nature of this type of agreement because, unlike a residential mortgage, the repayments for a buy to sell loan or bridging loan, are due at the end of the mortgage term.
A buy to sell mortgage can provide borrowers the finance needed to purchase property, without the tight restrictions that can come with residential property purchases on long-term agreements.
Some bridging loan agreements have lower early repayment fees or no early repayment fees at all, which can be better for some investors who want the ability to repay early without financial penalty, as this leaves more room for profit once the balance is settled.
There are lots of variations of buy to sell products, each with different mortgage term lengths, interest rates, deposit requirements, and criteria that you’ll need to meet if you want to get approved.
How does a buy to sell mortgage work?
Buying a property either at auction or on the market via an estate agent can provide people with a good investment opportunity, especially if they have experience in flipping houses and understand the risks involved with buying and selling property in a short space of time.
A traditional mortgage often has a longer contract term, usually ranging from 10-40 years, whereas a buy to sell mortgage is typically paid back within 12 months.
This short mortgage term gives the borrower a small window of time to repay the capital and interest of the loan back in full, so the risk is arguably much greater than that of a residential mortgage which gives the borrower longer to make repayments.
Interest rates for buy to sell mortgages
Interest rates can vary between lenders and the rate of interest you’re charged for any variation of a buy to sell mortgage product will depend on:
- Your choice of lender
- The size of your loan vs the value of your property (loan-to-value rate)
- Your deposit size
- Your credit score and history
- Your debt-to-income ratio
- The stability of your income
- The type of property you’re buying
While interest rates for buy to sell mortgages are typically high, in some circumstances, a borrower could pay less interest overall compared to someone taking out a residential mortgage.
A residential mortgage has a longer mortgage term which results in an accumulation of interest over time.
The length of time a borrower has to repay their buy to sell mortgage is much less, with agreements ranging from 3 months to 24 months.
Buy to sell mortgage deposits
Because of the additional risk that lenders accept when approving a mortgage for a buy to sell property, a larger deposit is often required and while this reduces the loan-to-value ratio, it does mean that those looking for flexible lending with shorter terms can need 25% of a property’s market value.
Finding the spare capital or saving a larger deposit can be frustrating but remember, if you can’t pay back your loan, the lender could have an unhabitable property, partially renovated, that they can’t sell.
Owning a larger proportion of the property’s equity upfront also reduces the likelihood of you falling into negative equity.
Buy to sell mortgage deposit example
To find out how much deposit you’ll need for a buy to sell mortgage, ask a mortgage expert with experience in negotiating and overseeing buy to sell mortgages.
That way you’ll have access to a professional who can quickly calculate the different deposit requirements with different lenders, for a clear overview of your options.
| Buy to sell property with a market value of £200,000 | ||
| Deposit size | Loan-to-value ratio | Deposit in GBP |
| 20% | 80% | £40,000 |
| 25% | 75% | £50,000 |
| 30% | 70% | £60,000 |
| 35% | 65% | £70,000 |
| 40% | 60% | £80,000 |
| 45% | 55% | £90,000 |
| 50% | 50% | £100,000 |
Costs involved with buy to sell mortgage transactions
Factor in additional costs when calculating how much your property purchase and potential renovation plans will cost you.
Create a budget and keep money aside for unexpected costs as well as the standard fees that are paid during the process of buying property and taking out finance.
Properties require maintenance too, even if only for a short period of time, and keeping your investment in the best position to sell will be important if your goal is to make a profit.
- Auction fees
- Solicitor’s fees
- Mortgage broker fees
- Arrangement fees
- Contingency fund
Buy to sell mortgage options
If you want to buy a property and pay it off quickly, you may need a specialist mortgage product like a buy to sell mortgage or another form of a bridging loan.
If you plan to live in the property and you’re happy to wait a few years before selling and the property you’re buying is deemed habitable, you may find that a residential mortgage is better or even cheaper but that’ll really depend on your own financial and personal circumstances as well as any early repayment fees that could apply.
Each of the listed examples is a typical buy to sell mortgage product but with so many banks and lenders in the UK, keep in mind that the terms for each variation of mortgage, will vary massively between each.
Ask a mortgage broker to listen to your circumstances and narrow down the options that are most likely to be worth your time.
It could be a quicker and more efficient way of finding the right finance for your buy to sell property plans.
Short term loans
These span between 0-12 months but contract lengths can vary depending on the lender. This type of finance helps investors purchase property at auction with a mortgage in principle behind them.
Having finance in place can reduce the chance of the sale falling through, especially for purchases at an auction.
Refurbishment finance
A refurbishment mortgage may be more appropriate for buying a rundown property, with the aim of refurbishing and then reselling for a profit. Lenders typically offer products for ‘light’ refurbishment and ‘heavy’ refurbishment.
Refurbishment loans are often assessed on the value of the property, post refurbishment, so depending on your circumstances, you might be eligible to borrow more than on a residential mortgage.
Flexible buy-to-let mortgages
If you want the option to be able to rent out your property for a short period of time a flexible buy-to-let mortgage could be a route to explore as sometimes these mortgages come with low early-repayment charges.
Some investors buy a property with the intention of selling it later down the line but before they do, they rent it out to make money, which could be further invested into the property or a new investment opportunity elsewhere.
Property prices can increase and decrease over time too, and in some cases, investors rent out their property until the value of it increases.
It’s at that point that they decide to either sell the property for a potential profit and clear their mortgage, or continue to rent it out and wait for property prices to increase further.
Of course, the risk comes with the uncertainty of property prices, which can decrease too.
Pros and cons of buy to sell mortgages
Pros
- Funds can be released a lot quicker when compared to traditional mortgages. This can be important, as auction deals often require buyers to complete within 28 days.
- buy to sell mortgages can be used to make a profit when the purchase price of the property is significantly less than the potential value.
- Some types of buy to sell loans are assessed on the value of the property, post refurbishment as opposed to the current value, which means you could borrow more.
- The criteria relating to the condition of the property can be more flexible for a buy to sell mortgage as unlike with a residential mortgage, the property doesn’t need to be habitable (have secure windows, a kitchen, electricity, running water, etc.)
- A buy to sell mortgage is usually repaid on sale of the property, or by transferring the loan to a residential or buy to let mortgage when the property becomes habitable.
Cons
- You will usually need to be able to put down a larger deposit in comparison to other mortgage types because this type of short-term lending can be deemed riskier by some lenders.
- Buy to sell mortgages tend to have higher rates of interest and high late repayment fees.
- Buy to sell mortgage products that are taken out for properties that won’t be lived in by the borrower are unregulated and therefore do not receive the same protection from the Financial Conduct Authority (FCA).
- Finding a lender on the high street for a buy to sell mortgage can be tricky as not many UK banks provide this type of lending.
Buy to sell mortgage approval tips
Improve your credit score
Lenders look at lots of factors to determine the likelihood of you not repaying your loan and your credit score is one of them.
There isn’t a minimum credit score needed to get a buy to sell loan but having a higher credit score can increase your chances of getting approved because it shows that you have a good history of borrowing and repaying on time.
Get experience in property flipping (or prove you’ve done it before!)
Getting a mortgage to buy and sell a house quickly can be difficult for a first-time buyer or a borrower without experience in property flipping so proof of experience in related fields or useful skills like carpentry, plumbing, or building can help to evidence that you’re capable of the project and being able to follow through with your plans.
Present your budget and plans clearly
Investing in property is a risky venture and mortgage lenders will be keen to learn how you’ll go about renovating your property.
Be prepared to have a detailed budget and an exit strategy that proves that if you sell the house for less than you bought it for, you have the means to repay the difference.
Get mortgage advice online, over the phone, or face-to-face
Comparing buy to sell mortgage lenders and the different criteria they each have can take time. If you’re unsure of where to start your search or which documents are needed in preparation for an application, ask a mortgage broker and alleviate your concerns.
They know the process and can identify opportunities for you to save money or get accepted for a more flexible agreement.
Bottom line
Before you set your heart on a property, do your research, look at your credit report, and ask a reviewed broker to check your eligibility so you know how much you can borrow.
Don’t apply for a buy to sell product without first checking whether you’re likely to get approved – that’s a quick way to get a mortgage rejection which could further impact your ability to get a mortgage.
Ask for help and get clarity about what you need to do next, whether that be preparing your documents for a buy to sell mortgage application or exploring an alternative route.