Increasingly, UK investors are using short-term bridging loans to fund time-critical property purchases and investment opportunities. But what exactly is bridging finance, and how does it work?
Importantly, what benefits does bridging finance bring as an alternative to more conventional High Street loans and mortgages?
Why is Short-Term Property Finance So Popular?
The popularity of short-term property finance is attributed to the fact that investors’ projects are often similarly short-term in nature. Particularly for those looking to flip properties for profit, the intention is often to have the entire venture complete in a matter of months.
This is where the flexibility and accessibility of bridging loans come into play. A property development bridging loan can be arranged and accessed within a few working days.
For investors looking to capitalise on time-critical property purchases and investment opportunities, nothing gets the job done quicker than a competitive bridging loan.
How do Bridging Loans Differ from Development Finance?
A bridging loan can be taken out for almost any legal purpose whatsoever. But in the property development arena, there are basically just two broad categories of short-term finance available – bridging loans and property development finance.
Both of which can be equally flexible but have their own unique features and properties.
Here’s a brief overview of how these two facilities work:
A bridging loan is essentially a short-term secured loan, which can be taken out against almost any type of residential, commercial, or mixed-use property. It works in a similar way to a mortgage but can be arranged much faster and is designed to be repaid within 1 to 24 months.
Bridging loans can be issued in sums of anything from £50,000 to more than £50 million, in accordance with the value of the assets they are secured against. Typically charged at a rate of around 0.5% per month, a bridging loan can be highly cost-effective when repaid promptly. Hence, the majority of bridging loans in the UK are repaid within 3 to 12 months.
In order to qualify, an applicant must be able to provide assets of sufficient value to cover the costs of the loan, along with evidence of a realistic exit strategy. This means proof of a plan to repay the loan, such as selling the property the facility is being used to finance. Interest is almost always ‘rolled up’ into the final repayment, transferred to the issuer in a single lump sum on a predetermined date.
Property Development Finance
Similar to a bridging loan, property development finance can be quick and easy to arrange. Issued to cover the costs of more extensive property development and construction projects, development finance is usually issued in sums of no less than £500,000.
The main difference between property development finance and bridging finance lies in the way the funds are issued. With development finance, the loan is released in a series of stages, coinciding with the completion of key phases of the project. By contrast, a bridging loan is issued as a single lump sum as soon as the facility is authorised.
In addition, development finance is usually issued exclusively to experienced property developers and construction companies. Unless you have a proven track record in the field, you will unlikely qualify for development finance.
Both facilities can be equally affordable, but eligibility criteria are stricter with development finance. This can therefore make it a difficult product to qualify for as a first-time developer or when setting up a construction company for the first time.
Why Investors Are Flocking to Bridging Finance Specialists
The above goes some way to explain the skyrocketing popularity of bridging finance among UK investors. With bridging finance, you do not need a provable track record in the field. Nor do you need any specific knowledge or expertise – you simply need to present a convincing case to the lender.
Anyone with viable assets and a workable exit strategy can qualify for bridging finance. This makes it the ideal choice (and one of the only realistic choices available) for first-time investors, newcomers to housing flipping, and so on.
Where bridging finance and property development finance are both realistic options, discussing each with an experienced broker’s pros and cons is highly recommended. Your current financial circumstances, paired with your short- and long-term objectives, will determine which options are right for you.
How Much Does Property Development Bridging Finance Cost?
Before applying for bridging finance, it is important to take into account the core costs of the facility. Key factors that will influence the costs of your bridging loan include the following:
1) Loan to Value (LTV)
This relates to the size of the loan you take out based on the value of the assets you use to secure the facility. As a general rule of thumb, the higher the LTV, the more you can expect to pay in interest and overall borrowing costs.
2) Loan Term
A promptly-repaid bridging loan will always be much more cost-effective than a loan repaid at a later date. Interest accrues on a monthly basis, paving the way for significant savings when the full loan balance is repaid promptly.
3) Additional Fees
All lenders have their own unique policies on supplementary fees for bridging products. Examples of which include arrangement fees, valuation fees, transaction fees, early exit fees and more. A full disclosure of all borrowing costs should be provided by your lender, in a clear and transparent format
4) Credit Worthiness
Lastly, poor credit will not necessarily result in the rejection of your application. However, an excellent credit score can open the door to preferential rates and lower borrowing costs. If you have any questions or concerns regarding your credit score (or general financial track record), raise them with your broker before applying.
For more information on any of the above or to discuss the benefits of bridging finance in more detail, contact the team at Bridgingfinance.co.uk for an obligation-free consultation.