Last year, 5.5 billion worth of homes across England and Wales were “flipped,” meaning that they were bought and sold at least twice within one year. Property speculators, or flippers, can make a lot of money by fixing up homes and selling them for a higher price. However, flipping is a serious business. Doing it wrong can cause severe financial consequences for everyone involved.
If you’re thinking about jumping into the home-flipping market, you should know that you will be required to make many choices that can make or break your financial future. One of the biggest decisions you will make will be what mortgage to accept.
For property speculators who intend to sell or lease within one year of their purchase, there are a few mortgage options available. The most popular options tend to be bridge loans, reverse mortgages and flexible to let mortgages. Understanding the ways these loans work will be critical in moving forward with flipping.
Buy to Sell Short Term Finance
This particular type of short term financing is often called a “bridge loan.” Using a bridge loan may be a great option if you intend to sell a remodeled property within a year of signing the mortgage. Mainstream mortgage lenders often do not service bridge loans because they finance risky properties, so it’s important to find a specialized bank.
There are some downsides to relying on a buy to sell short term loan. First, many of these loans come with high monthly interest rates relative to other mortgages. Secondly, you may need to pay a fee of about 2 percent of the loan upon exiting. If these terms work for your financial situation, a loan from a bridge lender could be just right for you.
If you have been a homeowner for a long time, then you might want to consider releasing equity from your home in a reverse mortgage deal. By doing so, you can free up cash to use for several purposes. Initially you may want to use it to fix up your existing property, or it may help you fund the cost of fees in your next home move.
However, reverse mortgages can be expensive if only taken as a short term solution, so there may be better options for you depending on your individual circumstances.
Flexible Buy to Let Mortgage
Sometimes a flipper may decide to lease the property rather than sell it. In this case, a flexible buy to let loan is a better option. These loans sometimes do not have the exit fees that bridge loans have. However, it’s important to note that the property in question must be habitable at the time of purchase to qualify for these loans.
Flipping a house can be a great way to make money and have fun doing it. However, it’s important to keep your finances in mind. Understand the risks and benefits of your mortgage options before even looking at properties.