How Bridging Loans Can Support Property Development

Being successful in the property market depends on financial agility, which translates into being able to buy a good value property quickly, add value and then re-finance on appropriate long-term finance within a short space of time. Moving quickly is key, so what are the options for property developers and investors who aren’t sitting on a pile of cash?

Bridging finance

As the name implies, bridging finance is designed to get growth companies from one place to the next in their business strategy. These types of loans are typically taken out for short-term reasons and always have a clear exit strategy in place, which involves clearing the loan in full plus interest costs before moving onto a more permanent type of finance such as a mortgage.

“The interest rates are typically higher for these short-term business loans than other forms of traditional borrowing due to their specialist nature” explains bridging loan brokers Business Expert. “However there is some flexibility as sometimes the interest payments can be paid in a lump sum at the end of the agreed term, rather than on a monthly basis.”

This can come in handy for property developers and investors who need funding at the early stages of a commercial or residential project, which can vary in scale from a major development to just adding a new kitchen to a flat.

Often, bridging loans are used to convert uninhabitable properties into a state where a lender is happy to provide a mortgage or where the developer or investor sells the property and uses the profit to help fund the next project.

A house with a moss covered thatched roof

Most high street lenders typically don’t lend money for properties that do not have running water, a bathroom or a kitchen. In these circumstances, bridging finance enables the developer to get the work done and to get the property into a habitable condition, where he or she can exit into a full-term mortgage.

In certain scenarios, it may even be possible for the property developer or investor to raise 100% of the purchase price through a property bridging loan but this will depend on the finance provider..

Buyers frequently use bridging loans at property auctions as they are quicker than applying for a traditional loan. Auctions typically depend on a quick completion – usually within 28 days – and an instant exchange. Developers and investors find that bridging finance removes a great deal of stress from buying properties at auction, which means they can concentrate on making decisions about the alterations or renovations stress free.

A mortgage concept with a calculator

Open and closed bridging loans

Open bridging loans don’t have a fixed exit. In this scenario, the lender gives an ’up to’ a certain period. In contrast, closed bridging loans have a fixed exit date in place, for instance, the sale of the property when the proceeds will be used to pay back the loan in place.

Applying for a bridging loans

Traditional lenders typically need a large amount of information about a property developer’s income and credit history before they will agree to a loan. And, if potential customers fail to meet their strict criteria, they will not agree to the loan. In contrast, bridging finance providers want to know about the property, rather than the potential customer as it’s the property that is used to secure the loan – the sale of which is the exit strategy for the loan repayment.

Businessman offers a friendly handshake

Business Expert Director Tony Smith says: “Bridging finance is intended to be quick short-term finance, and although the flexibility of this type of lending method is fantastic, having an exit strategy in place is crucial to avoid running into any difficulties.”

The repayment terms can often be amended to suit the borrower, however, developers and investors are usually required to repay the loan within 12 months. A bridging loan is most notably a type of short-term business finance.

Additional costs

In broad terms, there is frequently a fee for arranging the loan, as well as administration fees as with all finance products, which will vary from lender to lender.

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