bridging loans

The complete guide to bridging loans for property development

Whether you are looking to create a building from scratch or you want to refurbish it, you might need to rely on funding sources. There are various types of loans you can consider to develop your property, but this guide talks about only bridging loans.

Like other loans, bridging loans are also short-term, high-interest loans that you can apply for to purchase land or property with the intent to construct or renovate it. Bridging loans are generally suitable when you want to construct or renovate a project before acquiring funds from the sale of your existing development yet to be completed.

Bridging loans last for 12 months. As you are borrowing money for a property yet to be developed or refurbished, the size of the loan will be calculated based on the projected value of your property, not the current value. The risk is too high in case your project does not deliver what you expected.

To qualify for these loans:

  • You must have a solid credit score. Though few lenders can entertain you despite a bad credit rating, the deposit size and interest rates will be too high.
  • It is easier to obtain a bridging loan when you have experience in property development.
  • You must have an exit strategy, for instance, selling the property or refinancing with a standard mortgage.

Why choose bridging loans for property development?

One of the greatest benefits of bridging loans is that they provide you with immediate access to funds. If you meet the eligibility criteria, you can easily qualify for the loan. As these loans are short-term, you can get rid of them within a year. You should have a defined timeline to be eligible for these loans. If the completion does not get over or you take a longer time to sell it to make the balloon payment, you will have to refinance it with a traditional mortgage.

Another benefit is they are versatile. They can be used for various types of renovation projects, from minors to majors. If you are seeking these loans for property development, you can use them for infrastructural developments such as foundation work and utilities.

How much does a bridging loan for property development cost?

The costs of bridging loans for property development depend on multiple factors, not to mention your credit score and experience play a vital role. Suppose your credit report is stellar, and you have experience in property development. In that case, you are likely to get the nod for a bridging loan without further ado, but you should look over the following factors:

  • Interest rates

Undoubtedly, bridging loans are very expensive. Compared to traditional mortgages, they carry higher interest rates. The interest rates charged depend on the size of loan and the risk involved. Interest rates can be charged monthly or daily depending on the policy of development finance lenders. Make sure you understand the structure carefully. Research interest rates so you manage to get affordable interest rates.

  • Fees

Apart from interest rates, these loans are subject to various types of fees such as arrangement fees, exit fees, legal fees and valuation fees. You should know the structure of fees before you apply for these loans. You will get complete details in fine prints in your agreement.

  • Early repayment charges

Not all, but a few development finance lenders charge early repayment fees if you pay off the debt before the due time. There is nothing wrong with repaying before time as long as you can save some money in interest. Make sure that you are able to save your hard-earned money despite paying an early repayment penalty.

  • Default penalties

Failing to repay the loan within an agreed amount will cause too much trouble. Your lender will impose a considerable amount of penalties and additional interest charges. As a result, the cost of the debt will quickly add up.

If you are concerned about the cost of bridging loans for property development, it is advisable to consult a broker. As they have experience and knowledge about the market, they will likely help you get the most competitive deal.

Make sure you choose a specialised broker. For instance, if you are looking to renovate or construct a commercial property, you should choose a business finance broker.

To find the best bridging loan broker for property development, you should consider the following factors:

  • Look for brokers who have experience in development bridging finance. The broker you choose should be the whole of the market.
  • Ensure that the FCA regulates the broker.
  • Evaluate the fee structure you will be obliged to pay to a broker. You may charge a portion of fees as well.

What are the alternatives to bridging loans for property development?

Though bridging loans provide immediate access to funds, they are unlikely to be suitable for all types of property development. You may need to look at other alternatives:

  • Traditional mortgages

While you do not have to wait too long to get funds, bridging loans can be exorbitant. Comparatively, traditional mortgages are cheaper, but the cost will be spread out over the years.

  • Mezzanine financing

Mezzanine financing comes in handy when you want to top up the loan by mixing private equity with debt. This financing is not the same as bridging loans known to fund the gap. You are simply raising money for development projects, and your lender will rely on your business equity, not collateral.

  • Commercial property loans

If your plan is not using the property for investment purposes, you can consider commercial property loans for commercial property development.

The bottom line

Bridging loans can help you fund your property development project. These loans are mainly ideal when you are planning to buy a property at an auction, you see it as an investment opportunity, or you want to build something on land and do not have money. These loans can be expensive, so it is recommended that you carefully assess your capacity to repay. For more such informative articles, visit here.