When most people hear the term “bridging finance”, they don’t usually think of property development. Instead, they think of someone trying to purchase a property who can’t get their mortgage sorted in time.
Bridging finance can help a buyer “bridge the gap”, so they don’t lose the purchase. They can then pay off the bridge with the mortgage when it’s ready.
However, the bridging world has long since evolved from this initial use into a complex market with a large variety of products. (For example, check out the Bridging Loan Directory, which lists a large number of bridging lenders.) Several of these products can be particularly useful to property developers.
Here’s a run-down of the bridging products we find most helpful to our clients.
Acquisition Bridging Loans
Build costs and interest rates are high, and labour is scarce. Right now, it’s a tough time to be a property developer.
But above all, the biggest problem our clients have is that there aren’t enough sites. This means that, when they find one that works, they often need to move quickly to secure the purchase.
Given the hot competition for sites, land owners have the power to dictate completion timeframes. These can be difficult for traditional development finance lenders to meet.
This is where bridging finance for property development comes in.
A good bridging lender will be able to provide you the funds to make the purchase within 4-6 weeks. This allows you to secure your site quickly, while your development finance lender completes the extensive due diligence they need to undertake.
Once that’s done, you simply pay off the bridge with the development finance.
Exit Bridging Loans
With interest rates the highest they’ve been in years, homebuyers’ finances are being squeezed.
A predictable consequence of this has been a slow-down in the property market. After the calamitous mini-budget of 2022, we saw a dramatic increase in mortgage rates and an accompanying panic in the market.
Fortunately, this initial panic has now subsided and rates have come down somewhat. But they are still significantly higher than they were a few years ago and will likely remain high until the Bank of England deems inflation is under control.
This is clearly dampening buyers’ appetite in the property market, as they can no longer afford to borrow as much as they could before rates started going up. We’ve seen several of our clients come close to the end of their sales periods without being able to shift their final units.
Luckily, there’s a bridge for that. An exit bridging loan (sometimes known as development exit finance) can be obtained to increase your sales period, buying you much-needed time to complete your sales.
The finance is secured against your completed (or nearly completed) scheme and can be used to
a) pay back your senior lender and
b) give you an equity release
This means that you don’t need to wait to obtain profit from your scheme before starting on the next one.
Refurb Bridging Loans
The final bridging loan property developers should know about is most applicable to people looking to get into the industry.
We often receive enquires from early-career developers and our advice is always the same: start small.
There’s no use in trying to cut your teeth on a 10-unit, ground-up residential scheme as lenders just won’t have the confidence to back you, no matter how profitable the scheme is. It’s important to build your experience in a reasonable manner and one of the best ways to do this is by finding properties to refurbish.
With a refurb bridging loan, you can borrow up to 75% of the value of a property and receive 100% of the costs of the works (monthly, in-arrears). This allows you to make those important first steps into the world of property development, without having to have large sums of money saved.
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