Bridging Loans For Property Development | How It Works

07-November-2023

07-November-2023 13:39

in Bridging

by Sam Hodgson

Bridging loans for property development can get development projects underway fast – but both experienced and first-time developers don’t always fully understand the range of options available.

Property development bridging loans are typically only accessible from private or specialist lenders, who aren't particularly approachable for newbies in the industry.

With complex products to facilitate all sorts of development projects, it's very difficult to work out what lender is best suited for you, and with what type of loan.

This is where a bridging loan broker comes in - to help you understand the best finance for you, sift through the options on the market, and guide you through the application process.

Throughout this guide, we’ll showcase the uses of bridging loans for property development, how they work, how much they cost, how flexible they can be, and how much you can expect to borrow.

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What are property development bridging loans?

Bridging finance – or bridging loans – is a short-term property finance loan with various use cases - one of which is for property development.

While they're most commonly used for “bridging the gap” between buying a new property and selling an existing one – they're incredibly useful for funding renovation projects, flipping properties, to more complex development projects. The main difference between bridging and traditional borrowing is of course its speed and flexibility of use.

See similar: What is property development finance?

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How does a property bridging loan work?

Property development bridging loans work like any other type of bridging loan or short-term financing. A bridging loan is secured against the value of property, or properties, being developed or invested in.

Here’s how it all typically works:

Application – Property developers apply for a bridging loan with a lender, typically with the help of an experienced broker who can compare lending options, providing all necessary details, such as; the scale and scope of the project, their individual finances, and information about the property(s) being developed.

Approval – A lender will review an application and determine approval through their own set of criteria, of which terms can differ from lender to lender and are also dependent on the situation. A lender will determine the terms, how long the loan will last, the interest rates, repayment, and any additional fees that may apply.

Funding – When a loan is approved, lenders provide the funds – with the aid of a good broker; this can happen very quickly (within two weeks, depending on complexity). The funds can then be used for the purposes of the borrower. In the case of property development, this might entail construction costs, renovations, or other improvements and related expenses associated with the project.

Development – With funds to hand, an investor or property developer can then complete their project, with an expectation that they will be able to later refinance or sell the property(s) that the bridging loan was secured against. Some bridging loans include a drawdown facility, so you can stagger your loan to suit your project, only paying interest on what you've drawn.

Repayment – When it comes to repaying the loan, the developer repays the bridging loan according to the terms set by the lender – this may include variances depending on the specific loan in question. Typically, a loan is repaid in full with the sale of the property(s) the bridge loan was secured against, alongside interest payments which can have multiple methods of repayment – including an option to roll-up interest to be paid in full at the end of the term.

For more details, watch our video: Bridging Loans Explained: Costs, Timescales, Examples, & How To Get One.

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How are they useful for property developers?

Bridging loans can be organised very quickly – and when it comes to property development and the potentially large costs involved, this can be very useful to get a project off the ground.

Many property developers use bridging finance to take action quickly on investment opportunities that arise, allowing them to capitalise on a profitable development project.

Without the funds to hand, investors might miss out on lucrative opportunities – this is the main reason why this type of finance is used best by experienced developers, as it can be the only alternative when bespoke solutions, and fast financing, are needed.

With development loans, borrowers have access to larger-scale projects – their ambitions can be more easily met with short-term financing as traditional borrowing oftentimes proves far too slow.

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What does a development bridging loan cost?

With property development finance, costs can sometimes exceed the initial expectation if they’re not clearly explained and laid out in advance (this is where a broker can help).

With a property development bridging loan, costs can vary depending on a few notable factors:

Loan Size – Property development loans are typically much larger than the average bridging loan due to project scale. Naturally, this affects the cost overall – the higher the loan amount, the bigger the interest payments (but your profit potential likely scales with this).

Interest rates – Interest rates for property development bridigng loans start at 5% per month, but more commonly range between 6.5-9%, depending on the risk and complexity of your project. There are typically multiple ways to repay interest, including; rolled-up interest payments, the standard monthly payments, or a retained interest method, to make this more flexible and fit in with your cash flow.

Additional fees – These include; valuation fees, arrangement fees, legal fees, broker fees - the costs of these fees will also vary depending on the lender and their terms.

Property development bridging loan

With large-scale projects or property development of any kind – whether simple renovation of one property or investment opportunities for multiple properties - it is very important to consider your overall costs. It is not unusual that development projects run over on costs, and delays are often an inevitability that borrowers must be prepared for.

Even if you are an experienced investor or property developer, the help of an expert bridge loan broker can be invaluable when it comes to finding the right lender and the best possible property development loan.

Property Development Bridging Loan Calculator

For an initial idea of cost and repayment, you can use our bridging loan calculator to get a quote.

This will give you a figure for what you'll expect to pay, so you can work this into your project budget, including:

Facility fee
Monthly interest (rate and cost in sterling)
Valuation fees
Lender fees
Broker fees
Admin fees

How much can I borrow with bridging finance?

Bridging finance for property development can be secured from £100,000 up to £25M – with lower rates for loans over £1M.

How much you can borrow will depend on the property's value, the amount of equity you have in the property, your loan-to-value (LTV) ratio, and your ability to repay the loan.

Typically, property development loans can be secured with LTVs up to 80% - depending on asset value and could potentially be higher with additional assets.

Depending on the lender, the amount you can borrow will be affected by your own situation and creditworthiness – with a property development loan; you would likely need to provide additional detail to lenders, such as; a business plan, projections which demonstrate the viability of a development project (if on a large scale) and, of course, a reassurance on your ability to repay the loan through an exit strategy.

To get the best possible deal, it is recommended that you seek out a reputable lender – and an expert bridge loan broker can help here by determining your borrowing capacity and ensuring you're getting the best terms possible for your property development loan.

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What type of properties can a bridging loan be used for?

Bridging finance can be used for a number of different properties, especially when it comes to property development. Here are some:

Residential properties – including single occupancy properties, Buy-to-lets, HMOs, and any apartment buildings.

Commercial properties – including office buildings, retail spaces, industrial properties, warehouses etc.

Mixed-use properties – These are properties that have a combination of residential and commercial units, such as a building with retail spaces on the ground floor and apartments on the upper floors.

Auction properties – bridging finance can be used to purchase properties at auction and properties that may be in an unmortgageable state.

Land –This can include undeveloped land or land that is slated for development, such as a property that has been zoned for residential or commercial use – an investor can make use of a property development loan to build on a site, or develop and renovate existing property.

Need a bridging loan for property development?

At Clifton Private Finance, we can facilitate a property development bridge loan via a number of specialist lenders across the entire short-term market – loans of this kind are typically only available from private and specialist development finance lenders. Without a broker, they can be difficult to approach directly. We can ensure you get to the right lender for your property project and get the best possible rates.

Whether you are a property developer or investor – we can get you a decision in principle quickly, for whatever your purposes are for a property development loan.

With our expertise and depth of knowledge, we can find you an appropriate lender with favourable rates.

Call us on 0117 959 5094 Or click here to make an online enquiry with us.