Ever wanted to fund a property development or investment quickly, but were unsure how you might achieve this? This blog highlights all you need to know about using bridging loans in this scenario…
Property developers and investors need to be able to act fast when new opportunities present themselves. But, sometimes finding the right finance solution to help can be a bit of a barrier to their success.
That’s where a short-term funding solution like bridging finance could help. In this blog, we’ll highlight situations when you might need this option and break down the basics of this solution, so you can make accurate and informed financial decisions.
What is bridging finance?
Bridging finance is a borrowing option that is taken out on a short-term basis, usually over 1 to 3 years, and is used until a longer term solution is put into place, such as selling the property or remortgaging the property.
When might you need bridging finance?
A property investor or developer can turn to bridging loans when they need quick access to funds in order to start their next project or complete an existing one.
Some examples of when these short-term loans may be needed are:
- One common reason for taking out short-term financing is to purchase investment properties at auction. The bridge loan is used to buy the property and fund any refurbishments it may require, in order to get the house into a habitable condition ready to be let out or sold on. At this point, if the refurbished property is to be let out, an alternative longer-term finance solution will be arranged.
- Some property developers may take out multiple finance streams when completing a certain project. After a while, these can become expensive and challenging to manage. In this instance, the developer may be interested in consolidating their loans into a single balance through bridging finance. Once the project has been sold, or the investor has remortgaged, the proceeds will be used to pay off the bridging finance.
- There may be times when you’ve found a house or a plot of land that you would like to buy, however it doesn’t have planning permission agreed and it is quite run down. In this case, you may be struggling to get finance approved for the purchase. Many people in these situations look to bridging finance to cover the purchase costs. Once purchased they apply for planning permission and when it is agreed they either sell it on for a profit or develop it themselves.
Why do people use them?
These solutions give people the flexibility they need to quickly seize investment opportunities, and so they are becoming more and more popular with property developers and investors.
The versatile and fast nature of this option makes it ideal for situations where people need funds quickly to develop property or complete a house purchase, so these are common purposes of this funding solution.
In some cases, they can even assist business owners who need immediate cash flow to help with issues or situations that arise in their company. For example, you may need short-term money in order to cover operational expenses or purchasing of stock.
Overall there are a range of different reasons why people use this solution, but one particular area that is a common use of this option is property developments and investments.
How are they repaid?
Unlike other finance solutions (where you make monthly repayments), these options are repaid in full when your longer-term solution comes into place. For example, you may use the proceeds you get from a property sale to pay off the bridging finance.
The type of loan you get can also influence how you repay. There are two main types known as open or closed bridging loans.
Open bridging finance is where you won’t have a set date when you need to repay. Instead lenders are a bit more flexible around your repayments, but usually they would like it to be cleared within 12 months.
On the other scale is closed bridging loans where you do have a set repayment date. With this option, lenders are a bit stricter and will expect the loan to be cleared on the date given to you.
How long do I have to repay the bridging finance?
Bridging finance is not a long-term borrowing solution. Instead, they are taken out over a shorter period of time, which means you don’t have a long window to repay.
Generally speaking, most lenders will offer you a term ranging from one to three years, however this can be dependent on the type of project that you are undertaking.
Due to this, it’s important that you think carefully about your options before you commit. You want to make sure that you have a solid exit strategy in place to repay the bridging finance at the end of the term, otherwise you are likely to run into some problems with your lender.
What interest rate could I expect to get?
Interest rates can vary on a case by case basis, so it’s hard to determine what you might receive.
Some of the factors which can cause variations include:
- The provider you go with and their qualifying criteria
- Type of property being used as security and its value
- Whether you have a good or bad credit history
- Loan size you’re looking for
- Predicted value of the property once complete
Usually, interest rates are higher than other finance options, due to the increased risk for lenders.
Summary
To sum up, bridging finance can be a great option for property developers and investors who need access to funds quickly to start or finish a project. However, before committing to this solution it’s always important to make sure that you have a clear and solid exit strategy in place to repay the bridging finance, otherwise you may encounter some problems.
Any property used as security, which may include your home, may be repossessed if you do not keep up repayments on your mortgage.
