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Bridging Loans for Property Development

Looking for bridging finance to develop a property? Here’s the key information you need to know

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: November 18, 2021

If you need fast funding to finance for property development, bridging finance can provide you with a short-term, interest-only loan with terms that are often more flexible than other types of finance.

In this article, we’ll be looking at how you can use a bridging loan as capital to fund a property development, what criteria needs to be met, and how you can get the best deal for your circumstances.

What can bridging finance be used in property development?

There are many scenarios where a property developer might use a bridging loan, including the following…

  • They own a plot of land with planning permission to build on but lack the capital to kick-start the work.
  • To fund the completion of a project, allowing the borrower to get it off the ground and pay up when it has generated capital.
  • To buy a plot of land they intend to build on quickly, perhaps to pip a rival bidder to it
  • To purchase a property they intend to redevelop at auction

With any bridging loan, the exit strategy is of fundamental importance, and in the examples given above, it would either be the sale of the completed property or moving the bridging loan onto a long-term financial product, such as a commercial mortgage

How does a development bridging loan work?

Bridging loans can live up to their name by ‘bridging’ the gap between an incoming debt and a mainline of credit becoming available, or by providing capital to a borrower when you quickly need to get funds.

These loans can be used for all kinds of development projects, whether you’re planning to build a property from scratch, or simply add an extra room to a building you own.

However, bridging loans tend to charge a higher rate of interest, which is why they are widely considered a short-term option for many borrowers before switching to a mortgage with a better rate.

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How much deposit do I need for a development bridging loan?

The most straightforward bridging deals are typically offered with a loan-to-value (LTV) ratio of between 70–75%, which means you’ll need a deposit of 30–35% since the interest payments will also be factored in.

For higher-risk commercial deals, such as a restaurant or petrol station investments, some lenders may reduce LTV to 60% or even 50% to safeguard themselves.

Higher loan-to-value deals (up to 100%) are available under exceptional circumstances, such as when the borrower can put up additional properties/assets as security.

However, this could mean paying extra valuation fees, not to mention the risk of having multiple properties repossessed if you’re unable to pay up at the end of the term.

Interest rates on a development bridging loan

Interest rates are typically high on bridging loans, at least compared to mortgages.

Some lenders will give you the option to pay it off monthly or take a ‘rolled-up’ deal where the compounded interest is paid as a lump sum at the end of term, added to the loan amount.

The latter is often a good option for borrowers who will be short on capital until their exit strategy pays out, but whichever kind of agreement you’re offered, it’s important to make sure you end up on the best rates available.

Getting the best interest rates

All bridging loan applications are assessed on a case-by-case basis, but the key to ending up on the most favourable rates is convincing the lender that you’re a low-risk borrower.

We’ve put together a quick round-up of factors that will make your application stand out to lenders, though to get the best deal, speak with a bridging loan broker.

They can use their whole-of-market access to find deals that may not even be available to the public.

A strong exit strategy

All bridging loans are assessed on the strength of the exit strategy, and the more likely yours is to pay off in the eyes of the lender, the more comfortable they’re likely to be offering you decent rates.

If your exit is the sale of a property, the lender will be keen for you to evidence that it will be sellable post-development and can be offloaded for the required amount.

Obviously, it can help if you have a firm offer on the table. If the exit strategy is a remortgage, the lender may request an agreement in principle before releasing the development funds.

Clean credit

Bad credit is usually only an issue for bridging lenders if they feel it will put the exit strategy at risk. They may be more concerned about this if the exit strategy is a remortgage based on a property’s post-development value and mortgage underwriters will be mindful of further adverse building up over the course of the loan.

That said, if you’ve been turned down for a bridge loan due to bad credit in the past, don’t be disheartened.

It may be possible to find a provider that will take a broader view of your application and base their lending decision on other factors. Make an enquiry to find out more.

Experience in property development

Having experience and a strong track record in property development will always help convince lenders that you can achieve your plans.

Providing evidence of your past projects may help you get a more favourable deal, but that isn’t to say getting a bridging loan as a first-time developer is impossible.

Some lenders are more comfortable dealing with new developers than others, and it always helps if your exit plan is watertight.

A healthy deposit

As we’ve already discussed, getting a bridging loan with a deposit of less than 30% deposit can be tough, but the best rates tend to kick in when you put down significantly more than that, if that’s realistic.

Those with a deposit of 40% or more are the most desirable to bridging finance lenders.

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Can I use a bridging loan to buy a house?

Yes, you can use a bridging loan to buy a house if you need to raise capital quickly.

Below are some examples of how bridging finance can be used to purchase a property:

  • You’re buying a property or multiple properties at auction and need to raise funds as soon as possible
  • You’ve been turned down for a mortgage because of certain factors (for example bad credit or loss of income) but know they’ll be resolved soon
  • You wish to purchase a property that is deemed inhabitable

Bridging loans can be used as a short-term fix to ensure that you secure a property, with many homeowners having an exit strategy to get out of a bridging loan by switching to a better mortgage rate or selling the property.

Can I use a bridging loan to renovate a property?

Yes, absolutely. Bridging loans are often used for this purpose as a developer can use the funds to renovate a property and sell it for a higher amount or borrow against its increased value from a mortgage lender. So, the exit could be either a sale or a remortgage.

The flexibility of bridging loans also allows borrowers to secure renovation funds for properties in various states of disrepair, even buildings mainstream lenders might consider ‘unmortgageable’, so long as your plans to make them habitable again are realistic.

Bridging loans for buy-to-let property development

It is possible to get a bridging loan for buy-to-let (BTL) property development, and with these deals, some lenders will be able to handle both the bridge loan and the buy-to-let mortgage.

This is known as a bridge-to-let, and LTV is usually capped at 75%.

The lender will likely offer you a deal in principle on the buy-to-let mortgage when the funds are due to be released, but the mortgage aspect will be subject to the provider’s criteria for this product.

Are there development bridging loans for Limited Company borrowers?

Yes, absolutely, and the rates you will receive will likely be no different. Lenders often treat these applications similarly to Ltd Company buy-to-let deals, and it’s common for them to request a personal guarantee from the company directors before releasing the funds. One thing which may help your cause is if the Ltd Company is a special purpose vehicle (SPV).

If that’s the case, the number of approachable lenders will likely be higher, but it may still be possible to find a favourable bridging deal if you trade as a non-SPV Ltd company.

Do I need income for a development bridging loan?

This is always assessed on a case-by-case basis, but technically the answer is ‘not necessarily’. If the purpose of the funds is to snap up a property you’re hoping to renovate and sell, the exit is the sale and not dependent on your personal income.

However, the provider will likely want to know how you’re planning to fund the renovation works with no income.

Regulated bridge lenders (those who provide loans for residential deals) usually want to see proof of income if the exit is a remortgage, unless the borrower is downsizing and holds enough equity to purchase the onward property without the need for finance.

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How long does it take to get a bridging loan?

In many cases, it’s possible to get a conditional offer in just a few days or even hours, though this depends on the property valuation and the strength of your exit strategy. In many cases, funds could become available in three to four weeks, though they can be available sooner depending on your circumstances.

Speak with an advisor to get tailored advice about bridging loan finance, and how soon you could raise capital.

Do I need a business plan to get a development bridging loan?

There are times when an underwriter may ask to see a business plan, namely if the property you’re hoping to land has commercial elements – for example, hotels, B&Bs or a shop with a flat above.

The underwriters may want to assess the associated business to make sure the investment is viable.

Deals like this occasionally call for a specialist lender, as some providers believe that certain commercial properties are too high risk to take on.

Bridging finance vs. development finance

Bridging finance and development finance are similar products. The key difference between them is that development finance is dished out in stages and its suitability versus a bridging loan depends on specific circumstances.

If you don’t have the funds to complete works on a project, then development finance may be the means to access these funds.

It can work in conjunction with a bridge loan, as the bridging would be used to cover the purchase of the property and the development finance would be released in stages to cover the works.

The lender will recalculate the value of the property as it increases with each stage.

So, for example, let’s say a borrower wants to buy a property worth £100k and has £40k to put down.

The gross development value (GDV) is £200k and the proposed works will cost £50k, but the borrower only has £10k to get the ball rolling on them. In this case, the lender would offer a total loan of £120k (the price to purchase the property plus the amount required for the works) but would only advance £70k for the purchase (assume the £10k difference is to cover fees added etc).

Once the initial £10k has been invested, the lender will come out and re-value the property.

Assuming the value has increased by £20k they’d release another £10k for the next phase of works. Rinse and repeat until the project has been completed.

Are interest rates the same for development finance?

They are usually like regular bridging loans, though be mindful of the overall cost.

Some lenders charge a fee for every inspection they carry out during the development phases, and this can amount to hundreds of pounds each time.

That said, the interest you will pay is likely to be based solely on the amount that has been advanced to you.

If you think development finance is a better fit for your needs than a bridging loan, get in touch and we’ll introduce you to a specialist development finance broker for a free, no-obligation chat.

Speak to an expert about development bridging loans

For further information about finding a bridging finance broker and get the ball rolling on your application for one, call us on 0808 189 2301 or make an enquiry.

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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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