How To Get A Property Development Bridging Loan
There are various short-term finance options which could suit your development project. But most of them aren’t available from high street banks, and you won’t find them on price comparison websites.
Site availability, good design, a dependable building team with strong project management, and skilful marketing are all critical factors in the success of a development.
But the profitability of your venture hinges on the cost of your finance.
Short-term finance is one of the options that may be a key element for you at a particular stage of your scheme – and not just as get-out-of-trouble funding.
It's not the cheapest form of development finance. But when sourced judiciously and used effectively it can be a fast and effective type of finance that gets a project started, unblocks a log-jam of funding, or gets a development over the line to completion.
In this blog we’ll look at:
- How short-term finance can work for you
- The types of borrowing available from the lenders we work with.
1 Short-term finance to buy land
Potential development sites don't sit around waiting to be discovered by drive-by would-be developers.
Unless you already own your building plot, a short-term bridging loan is likely to be the fastest form of finance that will help you beat off competing purchasers and get your project started through the planning application process while you set up the cheapest development funding available to you.
Don't look to the high street...
First-time developers usually approach a high-street bank or building society for a staightforward mortgage to buy a plot of land.
You could save yourself the time.
Most traditional lenders don't consider unimproved land to be a sufficient security in its own right, and they won't consider lending.
But it IS possible to get a loan to buy a plot of land.
A good mortgage broker can take your application to one of the specialist land mortgage companies or private banks who take a more entrepreneurial approach to risk-taking and deal-making.
Most of them prefer to lend on land purchases where planning permission has already been obtained, particularly if you don't have an established track record in development. But some of them are willing to consider cases where there appears to be a good likelihood of planning permission being granted.
They will usually expect you to put down at least 50% of the land cost, but it is possible to achieve a higher LTV with the right circumstances, and the right approach.
2 Short-term finance to refurbish an existing property
A renovation fix-and-flip is a common route into development for first-time venturers. It's a useful way of building up capital and developing the experience which will attract finance more cheaply and easily for future projects.
If the property is currently uninhabitable, or you intend to sell it as soon as the work is completed, it won't be eligible for long-term mortgage finance. Bridging finance for up to 12 or 18 months should usually give you enough time to get the work completed.
High street lenders will be concerned that the resale value of a property will actually decline while substantial works are in progress (walls are demolished / extensions are being built...). Experienced mortgage advisers have access to specialist lenders who can offer bespoke refurbishment loans which will be the most suitable kind of finance for refurbishment work.
The key issue deciding the type of finance you need (and how much it costs) is the extent of the work that's required on this property (as well as your project experience and credit record).
Borrowing for a light refurbishment
These are usually smaller projects. Your project should quality for cheaper light refurbishment finance if:
- There's no change to the nature or purpose of the premises (for example, you're not converting a care home into flats)
- It's a "permitted development" (planning permission is not required)
- The building works don't have to comply with building regulations
This means that a light refurbishment loan can usually be used for work on a residential property that doesn't require planning permission, or interior renovations on an HMO buy to let.
Borrowing for a heavy refurbishment
A heavy refurbishment involves substantial building works where:
- There's a change to the nature of the premises
- Structural (load-bearing) works are involved
- The increase to the footprint is larger than allowed under permitted development
- Planning permission will be required
- Building regulations apply
A heavy refurbishment bridging loan is usually the type of finance you'll need for property extensions, significant structural works, or conversions - such as turning a large house into a children's nursery.
Lenders' definitions vary
The criteria for what counts as a light or heavy refurbishment vary from lender to lender. A good broker who's aware of the fine distinctions, and takes your application to the finance house that will look on it most favourably, will be able to save you thousands on the cost of your finance.
And if your project is a borderline light / heavy project, approaching a lender who deals with both types of finance can save you hundreds of pounds in repeat surveyors' fees if you're turned down by their light refurbishment department and need to be be referred for heavy refurbishment finance.
Do you need Development Finance?
Different lenders have different thresholds for the cost of work (as a proportion of a property's value) they will consider as heavy rather than light refurbishment. But when the total cost of works will exceed 50% of the property's value you're looking at a more substantial development for which development finance will probably be more appropriate. More about development finance »
3 Short-term finance to fund a new build
If you're planning to build a home for yourself a number of high street banks and building societies offer self-build mortgages.
These can be a low-cost way of financing the construction of a single dwelling intended for your own use. Funding is made available in stages as the build progresses, with the cost of finance spread over a long-term mortgage period eg 25 years.
Lack of flexibility from the high street
But if you're looking to build more than one property, or an investment property that you intend to sell or let out, you'll find it harder to source the type of finance you need from high street lenders.
Those who will consider it may want your cash contribution to go in first, which can be an issue if cash flow management is going to be difficult.
Development finance pros and cons
Fortunately there are some very good development finance lenders who specialise in the area of ground-up development.
- It is possible to secure up to 100% development finance. Clifton Private Finance works with some lenders who are prepared to fund the entire development cost if the land is already owned and planning permission secured.
- But 100% development finance is usually only available to experienced developers.
- And funding will be available in staged drawdowns that will be dependent on specifed works being completed by agreed stages.
Bridging finance pros and cons
If time is of the essence, and you have alternative assets to secure lending against, a bridging loan might be your more flexible borrowing option for a new build:
- Quicker to set up than development finance
- Less dependent on development experience and your credit record - because secured primarily against property assets
- Total funding available from Day 1
- No requirement for staged drawdowns
4 Development exit finance to replace your existing funding
This is a type of bridging finance which can be very effectively deployed to save on the costs associated with your current lending:
- If you're coming to the end of your project but you won't be completed and sold before your current funding is due to be repaid, your current lender may refuse to extend the loan term, or may charge you a punitive rate.
- If you want to take advantage of the increase in value of your project to leverage a better interest rate.
Development exit finance for Hertfordshire owner-developer
A home owner client in Harpenden planned improvement works to significantly increase the value of his property before selling it on.
This was a regulated loan: he had secured the £250K cost of the works over a 12-month period
Unfortunately, problems with his building contractor meant that substantial works didn't commence until he was four months into his term of finance. The replacement builder was not going to be able to complete the work to the original schedule and our client was in danger of defaulting on his loan.
He needed £300K to repay the original loan and interest costs within weeks.
We secured a decision in principle within 2 days and had the required finance available for drawdown within 2 weeks. He completed the work with a GDV of £1.7M.
Contact us to discuss the development finance you need
Development finance is complex. Short-term borrowing for development can be expensive, but extremely effective in the right circumstances.
Here at Clifton Private Finance we have strong professional relationships with private banks, specialist lenders, family offices and wealth managers. We can access our network of lenders on your behalf to identify the best short-term finance deals that could be available for your development project.
Call us at any time to arrange a convenient time to speak to one of our development finance specialists:
And if you've found this blog useful do pass it on...