Bridging finance for property development is a common and versatile way for investors and developers to achieve their property project goals as efficiently and cost consciously as possible.
When to Use Bridging Finance for Property Development?
There are a number of occasions when a bridging loan can be used by savvy property investors and developers to both acquire the asset, as well as funding the project refurbishment costs.
One of the key benefits of using bridging finance is because it is much quicker to get than a regular mortgage. This means that investors have the option of buying future development projects at auction, repossessed properties from LPA receivers, as well as off market deals from estate agents, where speed of completion is critical, and can in fact be the deciding factor in winning the deal. With funds usually available within 2-3 weeks, this often presents an attractive option to the vendor, knowing they will get their cash in such a short time span.
Another useful feature of bridging loans is that they are available for most types of property, even when they are uninhabitable, unmortgageable or need legal/planning work before you can begin the refurbishment or development works. For example, a common use for bridging finance for property development is when an investor wishes to acquire a former office building, that may well be located in a prime spot in the town centre, which might be an ideal location for residential accommodation. However, without the planning consent in place, and the refurbishment works complete, the developer would be unable to get a mortgage on the property. This is where a bridging loan comes in.
A bridging loan could be used to acquire the property, pending the consent, then as soon as the consent is attained, they could actually use the same bridging facility to finance up to 100% of the finance costs, as long as the total loan remains within a certain loan to value (usually 70% loan to GDV). Not only that, there would be no monthly payments throughout the course of the loan, thereby benefitting the developers cashflow.
Aside from purchasing a property before the consent is through, a bridging loan can also be used when you need to change the legal title i.e when buying a large house and converting into apartments, or when you wish to change the class of the building i.e from commercial to residential or vice versa. Also, another useful feature of bridging loans is that they are often based on the asset value, rather than the purchase price. So, when you are making your auction purchase or distressed sale at a good discount, you can often borrow more than a traditional mortgage, with up to 100% of purchase price available if buying sufficiently under value.
As you can see, there are many versatile ways to enhance your property business leveraging the flexibility of bridging finance for property development.
What Else Should I Know About Bridging Finance for Property Development in the UK?
A bridging loan is used for making the initial land or property acquisition, it can be used to change legal or planning issues, and it can be used to conduct light, moderate and heavy refurbishments; but in most cases, it is not used for ground up property development. Ground up development is usually a separate product with its own conditions, and in many cases, the preserve of specialist development lenders, especially when developing in Central London where the property values can be a lot higher.
There are different ways that the specialist bridging lender will treat the interest for the loan. In some cases, the lender will calculate the total interest that would be required for the full loan duration, typically 12 months. They will then deduct this figure, along with the fees, from the gross loan, leaving you with a day one net loan, which could be quite a lot less than the 70% you thought you were getting. This is called “retained interest”.
However, there are some lenders who will allow this interest to be added to the loan, only deducting the fees from the initial advance. This has the benefit of affording a much higher day one net loan, making the developers cash go much further. This is called “rolled interest”.
In many cases, the cost of the refurbishment can be added to the loan terms, even though you may not have the planning or licence in place yet. This is beneficial as it saves on another application process, saves time and saves money, because you don’t have to go back to the solicitors or pay for another valuation report. With this type of refurbishment bridging loan, as soon as you show the lender that you have the consent or required licence, they will release your development money so you can get started right away.
Regarding when the refurbishment money is released, in nearly all cases, this is released in stage payments and in arrears. This means that you will need to budget the cashflow for the first stage of work. Once the work is done, the lender will arrange for a monitoring surveyor (MS) to visit the property to inspect the work and confirm the increase in value, upon which the lender will release the first stage tranche payment. The reason for this is because the property value must always remain within the pre-agreed loan to gross development value, or LTGDV.
To get the best terms and the highest LTV when searching for bridging finance for property development, it’s imperative to use the services of an experienced and specialist bridging finance broker such as Tiger Financial, as not all lenders take the same view on appetite and risk for each location and asset class. For example, some lenders have geographic restrictions, and others won’t do certain types of commercial asset. It all depends on knowing which lender is right for your deal, which is where the help of an experienced broker is invaluable.
How Much Can I Borrow in England and Wales?
This depends on many factors and variables, such as if it’s residential or commercial, where it is – both the micro and macro location, the profile of the borrower such as their experience, credit status and background net worth, the current status of the asset i.e derelict or if planning has been approved yet, and how easy it will be for the borrower to exit the bridging loan i.e via sale or mortgage.
As you can see, there are many things to take into consideration when a lender calculates the maximum loan, however, the maximum LTV tends to be a gross loan of 65-75% of the day one value, with up to 100% refurbishment finance available in arrears, as long as the total loan remains within 65-70% of the GDV at all times.
Outside of England and Wales, there are unfortunately much less options, but we can still help. See our Scottish bridging loan section.
How Much Will It Cost?
Every loan will be analysed by Tiger Financial and sent to the most appropriate lender for your project and circumstances. The lender will then underwrite your deal and provide finance terms on a case by case basis, with no set pricing. The cost will be very much dependent on the same issues that have an effect on the LTV. However, for good quality assets in a good location, such as a cathedral town in the South East of England, or other buoyant parts of the UK, you would expect low LTV bridging finance for property development to start around 0.6% per month but could be lower or higher depending on the deal.
In addition to the monthly interest, you will need to pay a lenders arrangement fee, usually 2%, occasionally an exit fee depending on the risk profile of the transaction, as well as professional fees for your solicitor, the lender’s solicitor, as well as fees for any valuations/quantity surveyors/structural engineers etc that may be required for the transaction.
How Long Does Bridging Finance for Property Development Take to Complete?
This is contingent on multiple factors, such as complexity of the refurbishment plan and the amount of legal work that needs to be done, however most bridging loans take 3-4 weeks to complete. They can sometimes be completed in less time, but this is heavily influenced by the preparedness of the legal pack, valuation and professional reports, as well as the borrower’s solicitor’s workload and efficiency. At Tiger Financial, we will work with you every step of the way, to ensure a smooth and efficient loans process.
How Can a Bridging Finance Broker Like Tiger Financial Help Me?
As a UK leading bridging loan and property development finance broker, we help you save time, money and effort when applying for your bridging loan. We will invest time to fully understand your business strategy and funding requirements, and using our granular knowledge of the industry, we will help you find the best loan for your project.
We also have long standing relationships with the best lenders in the market place. We will fight your corner, negotiate the rates and the highest LTV when required, help to reduce fees, and will tirelessly work to overcome any negative sentiment before it becomes a problem.
Other key benefits:
✅THE MARKET IS ALWAYS CHANGING.
The best lender today, might not be tomorrow. It’s our job to stay on top of the lending marketplace, so you don’t have to!
✅TIME IS MONEY
You will never know lenders like we do. Do you really have time to trawl Google, emailing dozens of lenders hunting for the best rate? Why not focus on doing what you’re good at and let us do what we’re good at: getting you the very best bridging loan and development finance terms on the market!
There are literally hundreds of different specialist property lenders. How can you know which one is best for you and your project? Some are risk averse, so ask for lots of data and will never accept any adverse credit, some lenders are quick, others are really slow, some ask for every bit of paperwork under the sun, others are more relaxed and more focused on just the underlying property asset. Some development lenders require a personal guarantee; others don’t. There are so many variables, using an experienced broker such as Tiger Financial is the only way to truly know you will be getting the best deal for your unique project and circumstances.
What Types of UK Property Can I Borrow Against?
In England and Wales, funding is available for most asset classes, including:
- Residential property
- Retail premises
- Commercial and semi-commercial property
- Golf Courses
- Hotels & B&Bs
- PBSA (Student accommodation)
- Petrol Stations
- PRS sector
- Development finance
- Investment Portfolios
- Industrial Units
- Nursing/care homes
- Mixed use properties
- Houses of Multiple Occupation (HMOs)
- Farms or agricultural property
- Offshore special purpose vehicles (SPV)
For properties located in Scotland and Northern Ireland, please call us to discuss your options.