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Bridging Loans for Property Development

Considering bridging finance for development? Need to know more about how it works and what the alternatives are? Our in-depth guide will tell you all you need to know

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: June 20, 2022

Bridging finance is a quick and uncomplicated way of accessing funds to commence, continue or complete a development project. Loans start from around £10,000 and there is no official limit to the amount you can borrow. However, it’s considered a high-risk lending model and the costs reflect that.

In this article you’ll learn how to determine whether a bridging loan is the right choice for your project, what the alternatives are and why using a broker could save you thousands.

Are there specific bridging loans for property development?

Not exactly. Bridging loans can be used for any purpose but when you apply you will need to state what you will use it for.

Whilst there are no specific bridging loans for property development, there are lenders who specialise in specific areas of bridging finance and identifying the right provider for your circumstances is vital.

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Eligibility criteria

Bridging finance is different from mortgages and most lenders focus on the property and business plan rather than your finances.

Applications are assessed on a case-by-case basis but there are common factors you need to consider before applying.

Exit strategy

You will need to show a solid development plan and clear exit strategy to settle the loan.

Common exit strategies include:

If your exit strategy is to sell, loans for residential properties in desirable areas are most likely to be approved as providers will have confidence in a timely sale.

How much deposit is needed?

A deposit of 40% or above will give you the widest choice of lenders and most preferential rates. Deposits of less than 30%, you will see your pool of lenders shrink considerably and the rates you pay go up.

You can borrow up to 100% if you have other assets to secure the loan against. These can include:

  • Other property
  • Cars
  • Jewellery
  • Gemstones

100% bridging finance is usually reserved for experienced developers.

Bridging loans for restaurants, hotels, B&Bs, petrol stations or other commercial properties considered high-risk may have a maximum LTV of 50%. Specialist lenders with experience in that field are the route to the best rates for such deals.

Development experience

Positive development experience will give providers confidence. Evidence of previous successful projects is a major boost to your prospects of approval and may help you secure a higher LTV or lower rates.

New developers must find a provider that is sympathetic to their situation so an experienced broker is invaluable. In this situation, you could also strengthen your application by partnering with an experienced developer.

If your loan is to develop commercial property to let out, lenders will usually want to see a viable business plan that matches their risk model.

Credit file

Bad credit won’t necessarily prevent you getting a bridging loan. A strong exit strategy will often satisfy a lender that their investment is safe. However, if repayment of the loan relies on you being approved for a mortgage, some providers will view a history of poor credit as potentially problematic.

Likewise, if you’re applying for a high LTV or there are other higher risk elements to your application, your choice of lenders might be limited or the rates you’re offered increased.

Your current financial picture

Although bridging loan lenders are more focused on the property than the individual, some will want to understand your current financial circumstances to give them confidence in your ability to settle the loan.

For example, while it is possible to obtain bridging finance with no income, providers will need to know how you would finance the development.

How to get a bridging loan for property development

To give yourself the best chance of finding the right deal, contact a broker as soon as you think you need bridging finance.

Bridging finance can help if:

  • You spot an investment opportunity and need to move fast
  • You’re preparing to buy at auction
  • You own land with planning permission but don’t have the money to begin development
  • You run out of funds midway through a development and need cash to complete it
  • Your project has amassed numerous lines of finance which are becoming expensive or difficult to manage
  • You are planning a self-build project

Regardless of your circumstances, follow these steps to give yourself the best chance of approval:

  1. Work out a business plan and how much you need to borrow
  2. Establish an exit strategy and realistic timeline
  3. Make an inventory of assets in case you need additional security
  4. Get together a portfolio of any previous projects
  5. Think creatively and be prepared to ask questions – bridging finance is flexible and a lenders’ major concern is securing their investment
  6. Contact an experienced bridging finance broker

In most cases, interest is rolled up and added to the loan when you settle so you don’t need to pay anything upfront and no repayments are due until the development is complete.

Bridging loans for land development

Bridging loans for land development are usually for land with no buildings. Not all providers will lend for this purpose.

It can be used to buy land with or without planning permission, but most providers prefer it already in place.  With so few lenders operating in this niche, it’s even more important that you find the right one to avoid overpaying.

Rates are higher than for bridging finance on a property as land is less liquid so, should a quick sale be necessary, the price is less predictable. You can often secure more affordable rates for land in a desirable area.

Loans for property renovation

Bridging finance is widely used by developers looking to secure a property for renovation. Cash can be released fast (sometimes within hours) and it allows you to buy dilapidated or unmortgageable properties such as non-standard constructions or properties with:

  • No kitchen
  • No bathroom
  • No running water

It can also help secure a site if you intend to apply for change of use.

Bridging loan funds are often used to get the property into a mortgageable state and then refinance to:

The value of the property can actually reduce while development is ongoing and parts of the building (ie walls) are demolished. For this reason, mainstream lenders tend to steer clear of this type of lending. In most cases, you will need to find a specialist lender.

Alternative finance options

Bridging loans can be expensive so it’s worth considering alternatives before committing.

Savings

Savings might be your best option but it can leave you in a financially vulnerable situation if the project requires a large chunk of what you have put aside.

Development finance

Similar to a bridging loan but funds are released incrementally as each stage of the project is completed. Interest rates are usually lower but some providers will charge to revalue the property before each loan tranche is issued so costs can rise.

Development finance typically takes longer to apply for and is not as flexible as bridging finance. For complex cases or where time is of the essence, bridging finance may be a better option.

Partnering with another investor(s)

Pooling money together with others could allow you to invest without borrowing. But bear in mind that profits will be split according to level of investment so do the maths first. If your development is going to provide a significant profit, any borrowing costs may be offset by substantial returns achieved by investing alone.

Loans

For light refurbishments on an existing property, you may be able to raise the funds with a business loan, secured loan or personal loan. However these are inflexible types of lending and you will need to demonstrate you have the ability to make monthly payments.

A loan may also be subject to early repayment fees so if you are looking to complete the project and then sell up and settle your loan, this could turn out to be more expensive.

Loans take longer to secure than bridging finance due to the additional checks required.

Remortgaging to release equity

It might be possible to remortgage an existing property and release equity to fund your development project. Rates will be lower than bridging finance but you will need sufficient equity to cover the amount needed and it puts your existing property at risk in the event of non-payment. Remortgage applications can take weeks to approve and some lenders may be reluctant to lend for some development projects.

Get matched with a development bridging loan expert

This is a specialist area of borrowing and lots of lenders only accept applications from brokers they have existing relationships with.

A brokers’ understanding of the nuances between different lenders’ criteria, and their working relationships with providers, could potentially save you thousands and ensure your development achieves maximum profit.

Our broker matching service will pair you with an experienced development bridging finance expert with a track record of securing deals for developers in your position.

Call today on 0808 189 2301 or enquire online to arrange a free, no-obligation chat.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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