Quick access to cash to buy a bargain property or to keep a project on track.
There are many benefits when using a bridging loan for small developments, allowing you to meet deadlines and make money.
If you own a small to medium-sized construction business, it’s entirely possible that on occasion you have had to let a profitable redevelopment project slip through your fingers, through lack of funding. Others of you have experienced problems during a build or redevelopment that needed a cash injection at the right cost to finish the works and keep the project profitable.
Lack of cash, running out of cash or getting it at the right time and cost are common problems for property developers – preventing either acquisition or successful project completion.
Small scale property developers often look to:
- develop a derelict barn or buy a plot of land, with full residential planning permission for residential or commercial conversion
- buy a property at a genuine discounted price with the loan based on market value, not purchase price
- refurbish an uninhabitable property which is not suitable for a standard buy to let or commercial mortgage at outset
- purchase an investment property that is inhabitable, but needs bringing up to scratch in order to make it suitable for letting
In situations such as those above, traditional mortgages are usually unavailable to developers. Thankfully, a ready and accessible answer may lie with a bridging loan for property development.
What’s involved?
The principle and practice of a bridging loan (also known as property development finance) is simple and straightforward – typically involving:
- you identifying your investment opportunity – for example, a dilapidated property to purchase with the potential for renovation and development
- applying for and receiving a two- stage bridging loan. Stage one is the purchase loan and stage two is the build loan, usually a series of stage payments, advanced as the work progresses
- making your purchase and buying the materials you need
- carrying out the renovation or development works – in that way improving its capital value
With a project involving refurbishment work the lender will make a decision on whether the project is classed as a ‘heavy refurbishment‘ or a ‘light refurbishment‘.
When the building works are done, a developer can then sell the newly renovated property, pay off the bridging loan and take profit that way, perhaps going again with another project. The alternative is to re-mortgage at the higher redeveloped value, pay off the bridging loan and extract, albeit a smaller amount of capital.
Most professionals sell on and take their profit that way.
Bridging loans are typically highly flexible and offer a way of turning plans for property development into a reality. They are more expensive than traditional secured lending and are designed to offer a cash injection typically repayable within a few days up to 12 months. But the opportunity to secure a project quickly and simply often means the returns outweighs the extra cost.
Loan to Value ratios
Bridging loans are typically offered at a loan to value (LTV) ratio of between 70% and 75% for an initial purchase. 100% of build/developments costs is available, providing the two loan components combined don’t exceed a certain percentage of the completed value (Gross Developed Value), usually 65%. This means that the borrower is in for 25-35% of the initial cost.
Loan to values or LTVs are not always based on cash into the deal. You may well be able to receive a bridging loan, with no cash in, if you have other security, such as a BTL property with no or a very small loan to offer as “additional security”
On the other hand, you may be offered a less favourable LTV if the proposed development project poses particular risks or problems.
The cost of borrowing
As we touched on above, there is no way around the fact that bridging loans are more expensive than many other forms of borrowing.
However, they are purposely designed to be relatively short-term – covering the duration of the building works and repaid from the proceeds of the property’s sale or remortgage.
Although the rate of interest may be high, there is less time for it to accumulate into an unmanageable sum.
Applying for property development finance
Although the cost of borrowing may be higher than other types of finance, arranging a bridging loan is typically much quicker.
Experienced developers will know what to expect and can often haggle for a cheaper interest rate. While development finance for first time developers is available, the lenders will expect a lot of supporting evidence before they grant the loan.
Provided your credit history is OK, you have sufficient deposit, and the lender has been sold on the financial outcomes of your proposed development (commonly referred to as an ‘exit strategy’), a bridging loan may typically be arranged very swiftly – giving you the chance to quickly secure an investment opportunity.
- About the Author
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Mark has worked in financial services since 1995, initially as a Financial Adviser and then a Compliance Officer.
He has been a Senior Holiday Let Mortgage specialist at Drake Mortgages since 2001. He is often quoted on lenders websites and can be found in the press, talking about holiday let and available finance.
