Written by Emma
August 15, 2024
Bridging finance for property development can get your development projects underway quickly, helping you to start or complete a project. Bridging finance is a short-term funding solution that allows you to not miss out on any development opportunities.
In this article, we will cover everything you need to know about bridging finance for property development to help you decide if it’s the right option for your property development project.
The biggest difference between traditional borrowing and bridging finance for property development is the flexibility and speed bridging finance provides.
What exactly is Bridging Finance for Property Development?
In the rapidly moving realm of real estate development, timing and financial flexibility can be the deciding factors between triumph and lost opportunities. Bridging loans for property development can make all the difference in this situation as these loans provide quick access to funds.
These loans provide a short-term finance solution, bridging the gap between immediate financial needs and longer-term financing, allowing developers to move quickly to secure and develop properties.
However, while it is simpler than obtaining a standard mortgage or remortgage, it is also shorter in duration and more expensive monthly.
Bridging loans normally start around £25,000, and there is no formal maximum amount you can borrow as long as you have assets to support the loan with.
Still, the terms are typically not more than two years in length.
We dive into the complexities of bridging loans, including their nature, specific varieties for property development, benefits, and the credentials required to obtain them.
What could they be used for?
Bridging loans can be utilized for a variety of reasons.
You might be thinking of getting a loan if :
-You want to buy a property at auction.
-You recognize an investment opportunity and want to act fast.
-You have some land to build on but lack the funds to launch a development.
-You need finances to wrap up a development.
Is there Bridging Finance specifically designed for Property Development?
Under the umbrella term of bridging loans, there are particular types tailored for property development.
These consist of:
Ideal for purchasing auction properties if money is required quickly to satisfy tight deadlines.
This financing option is specifically designed for large-scale renovation projects,covering both purchasing and construction costs.
These loans can help increase the value of a property prior to a sales or long-term financing application.
Each loan is created to meet the specific objectives of property developers. Taking into account elements such as project size, duration, and ultimate goal.
How does Bridging Finance for Property Development work?
Property development bridging loans function similarly to any other sort of bridging loan or short-term borrowing. A bridge loan is secured by the value of the property being developed or invested in.
This is how the process normally works:
STEP 1 –Application:
Property developers apply for a bridging loan with the lender, usually with the assistance of an experienced broker who can evaluate lending possibilities and provide all necessary details, such as the size and scope of the venture, their personal finances, and information about the property(s) under development.
Step 2 –Approval:
A lender will analyze an application and decide whether to approve it based on their own set of criteria, which can vary from lender to lender and are also specific. A lender will set the loan’s conditions, duration, interest rates, payback, and any other fees that may apply.
STEP 3 -Funding:
When a loan is granted, lenders give the funds, usually through a reliable broker, this can happen within two weeks, depending on complexity. The cash is then available to use for the borrower’s own purposes. In the case of property development, this may include construction costs, renovations, or other project-related alterations and expenses.
STEP 4: Development:
With money available, an investor or property developer can complete their project with the expectation of eventually refinancing or selling the property(s) against which the bridging loan was secured. Some bridging loans have a drawdown capability,allowing you to stagger your loan to suit your project while only paying interest on the amount you’ve drawn.
STEP 5: Repayment:
When settling the loan, the developer follows the terms specified by the lender,which may vary based on the specific loan.
A loan is often returned in full of the sale of the property against which the bridge loan was secured, as well as interest payments. This can be done through variety of ways, including the option to roll-up interest and pay it completely at the end of the term.
How much does a development Bridging loan cost?
Costs associated with property development funding might sometimes exceed expectations if not fully discussed and spelled out in advance (a broker can assist).
The total amount that can be borrowed is entirely dependent on the lender and the borrower’s situation.
The minimum loan size is normally £10,000, and the maximum for most lenders is £1,000,000, but this varies by provider, with some lenders giving loans substantially larger than £1,000,000.
Costs for a property development bridging loan might vary depending on a few key factors:
- Interest Rates– Interest rates for property development bridge loans begin at 5% per month but typically range between 6.5 and 9%, depending on the risk and complexity of the project. There are usually several options to repay interest, such as rolled-up interest payments, conventional monthly payments, or a retained interest approach, to make it more flexible and fit into your budget.
- Loan Amount– Property development loans are often substantially greater than the average bridging loan due to the size of the project. Naturally, this affects the overall cost: the larger the overall cost: the larger the loan amount, the larger the interest payments (even though your profit certainly scales with it).
- Additional Fees– These include evaluation fees, setup fees, legal fees, and broker fees, with costs varying based on the lender and their requirements.
How can Bridging Finance benefit property developers?
Short-term bridging finance can be provided to support the purchase of a site that lacks planning clearance, to locate a conversion or ‘light development’, or to refinancing while a completed scheme is sold.
How is a Bridging Finance different from development finance?
Development finance is intended to fund property development projects, with funding provided in phases throughout construction. This works well for larger building projects but is overly complex for smaller ones.
Bridging finance may be most appropriate for property renovations or minor conversions. This is due to the product’s simplicity, particularly when compared to the extensive checks required to obtain a mortgage. Bridging lenders may still disburse funding for refurbishment charges in phases over the loan period, but they have a far more basic perspective of the process.
At Bridging Finance, we work with experienced and established lenders who ensure your deal is structured correctly from the start and provide our expertise to ensure the deal works.
Start the process by submitting a free initial inquiry to us or call us on +44 011 63666339 to speak to one of our experts.
Why Us?
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