What is a Buy to Sell Mortgage?

A buy to sell mortgage is fundamentally a form of bridging loan. It's short-term, interest-only loan that enables a borrower to access funds for a property purchase with the caveat that the funds are repaid within weeks or months rather than years.

They work quite differently from regular mortgages and come with significant risk, varying fees and the need for a strategy. In the UK property market, you may often see the terms buy to sell or bridging loan used interchangeably to describe short-term financing for purchasing a property to renovate or flip it within a short period. Whilst they are the same product, buy to sell refers to the end goal, whereas bridging loan refers to the funding mechanism.

Intrigued? We’ll explain exactly how they work, who they are for and what they may cost here.

What are buy to sell mortgages for?

Buy to sell mortgages are commonly taken by property investors who wish to purchase a property, then sell it soon after. Typical residential mortgages don’t allow for this, leaving investors who may not have access to enough cash needing alternative ways to finance their property plans.

They are also popular options for those who have inherited property, have no plan to keep it, but need to renovate it before being able to sell it at a profit.

Those buying at auction may also want to secure a buy to sell mortgage. With similar aspirations to those who may have inherited a property they wish to sell, the loan allows them to purchase the property, improve it and then sell it.

Finally, some homeowners may wish to buy a house before they sell their existing one. If something desirable has come on the market, it may need to be snapped up quickly. A bridging loan enables this to happen and is then repaid upon the sale of the other property.

How does a buy to sell mortgage work?

A buy to sell mortgage, or bridging loan, works by “bridging the gap” between the funds available and the outstanding amount to purchase the property.

They are interest-only loans with repayments often made at the end of the term in a lump sum rather than monthly. This will vary by lender and the bridging loan taken out. We’ll cover these a little further down the page.

One of the key aspects of a buy to sell mortgage is the process of obtaining one. Where a typical residential mortgage requires you to prove your income, a buy to sell mortgage lender wants to know your strategy. They want to know how you plan to repay the loan and how quickly you will repay it. This could be achieved by using the loan to flip the property, make a tidy profit and pay back the mortgage. It could be that you are waiting for funds to clear from another property sale or for an inheritance to come through. Either way, if the lender sees that you have a clearly defined strategy to pay it back, they are more likely to approve your application. The only problem is that if you can’t pay it back, you might lose the home. Whilst this is still the case with a residential mortgage, you may have twenty-five years to pay that back, and lenders may be more accommodating in helping you. With a buy to sell mortgage, you only have a few weeks or months to clear the debt.

There are two main types of bridging loans used for buy to sell mortgages.

Open bridging loan

These loans have no fixed repayment date but have a time limit in which the debt must be cleared. This is normally within a year, although it is possible to find lenders offering longer terms. These tend to be the more expensive bridging loan options, but they offer an added degree of flexibility in repayment.

Closed bridging loan

These are loans with a fixed repayment date and are used normally when you have a buyer in place for the property you are selling, and you are just waiting for completion.

How long does a buy to sell mortgage last?

A buy to sell mortgage is a short-term bridging loan. These can typically run from just three months to two years. Compared to a standard residential mortgage that can last for 25 years or more, they require much faster repayment, and therefore present much more risk to both the lender and the borrower.

How much is the interest on a buy to sell mortgage?

We don’t have specific figures for interest rates for buy to sell mortgages, as lenders typically calculate interest based on a range of factors. Rates are normally higher than those found on residential mortgages, but due to the length of a standard residential mortgage, the costs can exceed those of a buy to sell product.

Lenders will determine the interest based on:

• How much you need to borrow vs the value of the property
• How much deposit you have
• Your credit score
• How stable your income is
• The kind of property you are buying
• Your DTI (Debt-to-Income) ratio

How much deposit do I need for a buy to sell mortgage?

Deposits for a buy to sell mortgage are, in most cases, higher than those for standard residential mortgages. This is because the lender faces more risk lending in the short term than they do over a term of 25 years or more. Furthermore, your exit plan may not work, and this could leave the lender with a property they are unable to sell.

It’s not uncommon for lenders to request a deposit of at least 20% but you should remember that the more you can put down as a deposit, the cheaper the cost overall.

In many cases, security on another property is used as a deposit instead of cash.

How much will a buy to sell mortgage cost?

Along with the interest, there are a host of other costs to consider when taking out a buy to sell mortgage. Just like when you buy a house with a regular mortgage, you’ll need to remember solicitors' fees, arrangement fees, and valuation costs. Additionally, there may be fees added for extending the payback period or paying the loan back early.

You should also factor in a contingency fund, especially if renovating the property with the aim of selling it. Renovations and repairs always cost more than planned, so having cash reserves to cover extra expenses should also be considered.

• Mortgage arrangement fees: 1%-2% of the total loan amount
• Valuation fees: Can be as low as £100 but as high as £1,500.
• Exit fees: A fee of 1%-2% might apply when you pay off the loan. (This doesn’t always apply, so you should check in advance.)
• Broker fees: It’s advisable to have a mortgage broker when seeking a buy to sell mortgage. Fees vary per broker and are determined by the complexity of the transaction.
• Legal fees: Can range from a few hundred pounds to a few thousand pounds.

What are the advantages of a buy to sell mortgage?

A buy to sell mortgage can provide a property investor or homeowner with several advantages.

• Funds can be easier to obtain with decisions often made in days, not weeks.
• There is great profit potential, especially if the purchase price is significantly lower than the resale value.
• Buy to sell lenders are less concerned about the condition of the property as they understand it is likely to be renovated and therefore are happier to lend where other lenders wouldn’t.
• The mortgage is normally repaid once the property is sold or by transferring it to a residential or buy to let mortgage.

What are the disadvantages of a buy to sell mortgage?

There are disadvantages of a buy to sell mortgage that those considering one should be aware of:

• You will need a deposit of at least 20%.
• The interest rates can be high.
• Fees for late repayments or early exits can be high.
• The number of lenders offering these products is quite small.
• If the property is to be lived in by the borrower, the mortgage offered will be unregulated, offering far less protection than other mortgages.

Buy to sell mortgages can be a worthwhile option for those needing short-term finance, but they can be expensive and come with an element of risk. Those considering such finance should speak to a mortgage advisor before committing to any financial commitment. If you own buy to let properties and are now deciding it’s time to sell up, speak to Bettermove. We are on hand to ensure the quick sale of your properties, enabling you to sell your property portfolio fast, without spending a penny. We assist with selling tenanted properties too, and offer a range of options that can see a property sold in as little as seven days. Contact us today to find out more.