Property Development Bridging Loans

Bridging finance can be a really useful short term funding option for property developers.

There are a whole range of situations where a bridging loan can offer the best option for finance:

• Providing the funding to acquire new sites that require planning permission.
• Funding light developments.
• Refinancing completed projects whilst they sell, refinance onto a long-term facility or a bit of both.
• Replacing a development finance lender where the relationship has broken down.

How much can I borrow?

This will largely be dependent on what you are borrowing the funds for. For residential properties it is possible to borrow up to 75% to 80% gross and 65% to 70% on commercial and semi-commercial properties.

What is the likely cost?

As we have access to the whole of market, we will always find you the best rate available for your particular circumstances.

In general, however, the lower the loan to value, then the lower the interest rate that will be available to you. Similarly, if you have a good credit rating you are likely to qualify for a better interest rate than if your credit rating is poor or bad. Factors that will affect the interest rate available:

• Type of property being used as security – residential property will have a lower rate than commercial property.
• The amount of relevant experience – experienced developers who have a proven track record of similar projects will attract better interest rates than a new developer looking to fund their first project.
• Location of the property – simply down to is it a good location. If the project is not in a good location, some lenders will not lend, leaving less possible options.

By speaking to one of our highly experienced brokers, we will be able to let you know the best current interest rate available to fit with your circumstances.

What is the difference between development finance and a bridging loan?

Development finance is very similar to bridging in that it is also short term and is secured on property. Lenders will also lend based on valuation and will want to know what the exit plan is.

Where development finance is different to bridging is that it is more specialist, in that it offers a developer an option to release funds in stages, ultimately raising more funds than they would be able to do through a bridging loan. This is done by offering a facility that will raise up to 100% of the build costs, in addition to the initial loan release that would be up to 70% of the site value.  

Development finance is often the best option for large development projects where the funds can be drawn down in stages over the course of the project. For smaller projects, such as refurbishments or small property conversions, the simplicity of bridging finance makes it a more suitable option.

Bridging loans are much faster to arrange than development finance, and some bridging lenders do have the option to draw down the funds in stages.

Both forms of finance are designed to be short term facilities, with terms usually up to 18 months. However, for larger projects development finance may potentially run up to 3 years.

Interest rates for bridging loans are expressed as a monthly rate, whilst development finance is usually expressed as an annual interest rate.

Using bridging to acquire a site – Planning Gain Finance

If you are buying some land with the plan to apply for planning permission for a new development, a bridging loan may be the most suitable option available to you. Often known as ‘planning gain finance’, you can use a bridging loan to purchase the land and give yourself time to apply for the required planning permission.

What is planning gain?

Property developers may choose to purchase land or property with the intention of applying for planning permission. Once this is approved the value of the land or property will increase and this is known as planning gain. The developer may then choose to sell the site on for a profit or develop it themselves.

What can planning gain finance be used for?

Planning gain finance can be used to help purchase the site and fund the planning application.

Development finance lenders will usually require you to have planning permission in place before they will agree to fund your development. They will usually insert a ‘mobilisation clause’ into any loan agreement that stipulates that you must commence the build within a given time frame, which can be as short as a month. If you need to apply for planning permission this won’t give you enough time to get this in place, but by using a bridging loan you can purchase the land and apply for the necessary permissions before you then apply for development finance to repay the bridging loan and to fund your build.

Planning gain finance exit strategies

If you are applying for a bridging loan having a strong exit strategy will be key to your application. With planning gain finance it is essential that you have a plan to repay the loan whether your application for planning is successful or not. Selling on land which has had a failed planning application may take a little longer, so you need to ensure that the term of the loan gives you enough time to exit.

Using a bridging loan to exit your development finance

Once you have completed your project and are ready to market the finished units, you can utilise a bridging loan to repay your development finance. It may even be possible to raise additional funds, depending on the LTV, which could enable you to move forward with your next project without having to wait for your current development to fully sell out.

The rates on development exit finance tend to be lower than on the original development loan as the level of risk for the lender decreases significantly as the project nears completion.

Raising additional capital

Due to the speed of the application process, bridging loans can be a good way for developers to raise additional capital.  This can be done by:

• Using the equity in other properties as security to raise capital to purchase another site.
• Releasing capital from a completed scheme to enable you to move forward with your next project.
• Raising funds for property refurbishments

Written By Holly Andrews