Why Use Bridging Finance to Fund Your Property Development Project?
Bridging finance for property development is rapidly increasing as it offers a unique way for property investors and developers to access a large amount of funds to fill their short-term funding gaps. It literally bridges the gap between the times when the funds are urgently needed and when the funds will be available by selling an asset or property. It gives property developers an edge in this competitive market to undertake a development project quickly, efficiently and affordably.
In this post, we will learn about what is bridging finance for property development, how it can be useful to property developers and how much they can borrow.
What is a Property Development Bridging Finance?
Bridging finance or a bridging loan refers to a short-term funding solution that can be quickly accessed to fund a property development project. It can be secured against one or more properties that are being developed or invested for 12 to 18 months. In property development finance London, a bridging loan can also be used to generate cash flow or fund light refurbishment works until longer-term financing is available.
Here are a few examples of when bridging finance can be useful to property developers.
- A property developer wants to undertake a ground-up development project or refurbish the property for renting or reselling. When it comes to property development, there are potentially large costs involved. Bridging loans in such circumstances can help them get the project off the ground.
- A property developer wants to take advantage of a property purchase opportunity at auction. The objective is to either sell it for a higher price or refurbish it for buy-to-let, at a point where a permanent form of finance is arranged. In the meantime, bridging finance in London can be used to purchase the property or undertake refurbishment work.
- A property investor wishes to secure a lucrative investment opportunity, but doesn’t have funds in hand currently. Bridging finance can help them get quick access to the funds, allowing them to purchase the property before anyone.
- A property investor is running short on funds and wishes to generate a short-term cash flow while acquiring planning permission to transform a commercial property into a residential one.
- A property developer has already undertaken a project and it is near completion. However, during the development phase, they have come across several unexpected expenses that become impossible to manage. A short-term bridging loan can be used to overcome those expenses until the sale of the property.
Key Benefits of Using Bridging Finance for Property Developers
Quick access to funds
Some property deals are time-sensitive. For instance, a property owner may want to sell their property at much below market rates when in need of urgent cash. That means there will be a furious rush amongst buyers to purchase the property. The property seller will be willing to sell to a buyer who has funds readily available so that the transaction can be completed quickly. Unlike a traditional mortgage that takes several weeks to secure, bridging finance can be approved within a few days and funds can be available quickly to complete property purchase.
Higher loan amounts
With property development finance, the lenders may allow you to borrow up to 90% of the property’s sale price, also known as the Loan to Value ratio. However, how much you can borrow may also depend on how much equity you have left in your existing property. Lenders view it as a high-risk loan and may willing to offer lesser LTV if you are not investing any equity into the project.
Unlike traditional mortgage loans, the interest on the bridging loan can either be paid monthly or rolled-up, leaving it up to how you wish to make repayments. If you wish to repay only the capital at the end of the term, you can choose to make interest-only payments every month. If you wish to roll up interest payments, the interest is added to the loan amount and paid together at the end of the term.
Used for various types of development projects
Bridging finance for property development enables property developers and investors to raise the funds for various development projects. Whether you are undertaking a development project from scratch, refurbishing a property, or converting a commercial building to a residential building, a bridging loan can make it easier and more convenient to raise funds. And, once the development project is completed, bridging finance is repaid by renting out or selling the property.
Since bridging loans are short-term loans, they are designed to be repaid within a few months, rather than years. With bridging finance, interest rates start from as low as 0.5% per month along with minimal borrowing costs. In addition, there are usually no early repayment fees if the borrower wishes to pay before the term ends.
Purchasing uninhabitable properties
Many lenders in the UK only grant loans against properties that are in habitable condition during the time of application. With property development bridging finance, lenders allow property developers to raise funds against an uninhabitable property, with an aim to refurbish or redevelop it.
Should property developers run into unexpected situations, such as delayed sales or budget overruns, bridging finance can offer much-needed support to keep the project going. Often it takes longer for a property to sell than expected. In such cases, a bridging loan can be useful in clearing debts and paying the creditors, and then repaid when the property is sold.
How Much You Can Borrow with Bridging Finance for Property Development
With the bridging loan for property development, the loan amount can be secured from £100,000 up to £25M. However, how much you can borrow will still be dependent on your purpose, the feasibility of the project, the property’s value, the amount of equity you have in your property and how you plan to repay the loan (your exit strategy). Typically, property developers can raise funds with LTVs up to 80% based on the value of assets, and this could be higher with additional assets.
Property development bridging loans offer a unique blend of speed, flexibility and accessibility, which is often unmatched by other financing solutions. It enables property developers to seize unique investment opportunities that add value and increase profits. One important thing to consider while taking out bridging finance solutions is you must demonstrate a strong exit strategy.
Overall, a bridging loan may be just right for you if you are looking for a short-term financing option to undertake a property development or refurbishment project until a longer-term finance is arranged.