Do Property Developers Use Bridging Loans?

In the competitive UK property market, successful developers know the value of acting quickly.

Find out how bridging loans can give you the edge you need to secure prime properties and execute your development plans with confidence.

In property development, timing often determines a project’s success.

With the market constantly shifting and opportunities arising unexpectedly, developers require flexible financing solutions that can keep up. Bridging loans have become increasingly popular in this context.

This guide explores whether property developers use bridging loans and how these short-term financing options fit into the broader property development landscape.

Understanding Bridging Loans for Property Development

Bridging loans are short-term financing solutions designed to cover a temporary financial gap.

For property developers, this often means providing the funds needed to secure a property or start a project before long-term financing is arranged or more commonly, the project is completed and sold.

These loans have terms ranging from a few months to 24 months and are secured against property or other assets. At Respect Capital, we work with lenders offering competitive rates and loan amounts from £100,000 to £25 million.

They are arranged quickly and don’t require any monthly repayments. The loan plus interest is repaid in full when the term ends.

Bridging loans do come with higher interest rates, reflecting their short-term nature and the speed at which they can be arranged. However, this higher cost is often offset by the ability to move quickly on opportunities in the property market.

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Types of Bridging Loans for Property Developers

We can help you access various types of bridging loans suited to different development scenarios:

  1. Closed Bridging Loans: These have a fixed repayment date, often tied to a specific event like the sale of a property. They offer slightly lower interest rates due to the certainty of the exit strategy.
  2. Open Bridging Loans: These offer more flexibility with no fixed repayment date, but come with higher interest rates to offset the increased uncertainty.
  3. First Charge Bridging Loans: Secured as the primary loan against a property, similar to a first mortgage.
  4. Second Charge Bridging Loans: Secured behind an existing loan on the property, offering a way to release additional equity.
  5. Light Refurbishment Bridging Loans: For properties needing minimal work to be mortgageable or saleable.
  6. Heavy Refurbishment Bridging Loans: For properties requiring significant structural work.

When considering which type of bridging loan might suit your needs, it’s important to evaluate your project timeline, exit strategy, and risk tolerance.

Our expert brokers can guide you through this decision-making process, ensuring you choose the most appropriate financing for your specific project.

How Property Developers Use Bridging Loans

Developers in the UK turn to bridging loans in various situations where speed and flexibility are essential and it’s not unusual for them to have more than one on the go.

Auction Purchases

With most auction houses requiring completion within 28 days, auction finance offers a quick solution to secure properties without too much fuss or delay.

Refurbishment and Renovation

Bridging loans can fund the purchase and renovation of properties that don’t qualify for traditional mortgages due to their condition.

Below Market Value deals

A property can be bought Below Market Value (BMV) where the sale is distressed. This could be because the seller is under time pressure, has debts to repay or just has a need to move quickly.

Land Acquisition

Developers often use land bridging loans to quickly secure land, especially when planning permission is pending.

Breaking Property Chains

In situations where a developer needs to complete on a new property before their current one sells, bridging loans can prevent deals from falling through.

For example, one of our clients used a £1.2 million bridging loan to acquire a prime piece of land in Bristol. The speed of the bridging loan allowed them to secure the land ahead of competitors, with plans to refinance once planning permission was obtained for a luxury housing development.

Using a Bridging Loan to Buy Land (for Property Development)

Securing the right plot of land is often the first and most important step in property development.

However, land purchases can present unique challenges, especially when it comes to financing. This is where bridging loans can play a vital role.

Why Use a Bridging Loan for Land Purchase?

Speed

Land, particularly in prime locations or with development potential, can sell quickly. Land bridging loans can be arranged much faster than traditional mortgages, allowing you to move swiftly and secure the land before competitors.

Flexibility

Traditional lenders will not finance land purchases if the land doesn’t have planning permission. Bridging lenders are often more flexible and willing to consider the potential of the land. A planning gain bridging loan works in much the same way, allowing you to acquire land before planning consent has been granted.

Short-term Nature

You may only need the loan for a short period – until you obtain planning permission and can refinance with a development loan, for instance.

No Monthly Payments

Land bridging loans allow you to roll up the interest, meaning you don’t have to make monthly payments. This can be beneficial when purchasing land that isn’t generating any immediate income.

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Advantages of Bridging Loans for Developers

Bridging loans offer several key advantages that make them attractive to property developers:

  • Speed: We can often arrange bridging loans within 5-14 days, allowing developers to act quickly on opportunities.
  • Flexibility: These loans can be used for a variety of purposes, from property acquisition to renovation costs.
  • Interest Options: Many lenders offer the option to ‘roll up’ interest, helping with cash flow during the project.
  • Non-Standard Properties: Bridging lenders are often more willing to lend on properties without kitchens or bathrooms.

Potential Risks and Drawbacks

While bridging loans offer many advantages, they also come with potential risks that developers should carefully consider:

  • Higher Costs: Interest rates for bridging loans are higher than other loan types or development finance. Fees can also be substantial, impacting the overall profitability of a project.
  • Short Repayment Terms: The short-term nature of bridging loans means developers need a clear and viable exit strategy to avoid refinancing challenges.
  • Security Requirements: Most bridging loans require property or assets as security, which could be at risk if the loan isn’t repaid.
  • Market Risks: If property values fall or the market slows, developers might struggle to sell or refinance at the end of the bridging loan term.
  • LTV Restriction: Loans are based on current value not developed value (GDV).

Repayment Strategies

A clear repayment strategy is essential when using bridging finance.

The two most common exit strategies for property developers are:

Sale of the Developed Property

This involves selling the completed development to repay the bridging loan. It’s crucial to have a realistic assessment of the potential sale value and time frame.

Refinancing

This involves replacing the bridging loan with a longer-term form of finance, such as a commercial mortgage or buy-to-let mortgage if you’re planning to retain the property.

When planning your exit strategy, consider:

  • The current property market conditions and trends
  • Your project timeline and potential delays
  • The total cost of the bridging loan over your expected project duration
  • Potential backup options if your primary exit strategy falls through

Our team can help you develop a robust exit strategy, which is essential for securing approval from bridging lenders.

Property Development Finance: An Alternative to Bridging Loans

For larger or longer-term projects, property development finance might be more suitable.

This type of lending is designed specifically for property developers and differs from bridging loans in several key ways:

  • Loan Term: Typically 12-24 months or more, compared to the shorter terms of bridging loans.
  • Drawdown Structure: Unlike bridging loans, which are often released in a single lump sum, development finance is drawn down in stages as the project progresses.
  • Interest Payments: Development finance lenders allow interest to be rolled up and paid at the end of the term, helping with cash flow during the construction phase.
  • Loan-to-Cost (LTC) and Loan-to-Gross-Development-Value (LTGDV) Ratios: Development finance can provide higher LTC ratios (up to 90% in some cases) and LTGDV ratios of up to 65-70%.
  • Monitoring: Development finance usually involves regular site visits by the lender to monitor progress and approve drawdowns.

We can help you access property development finance from £250,000 to £100 million.

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Other Financing Options

Besides property development finance, other alternatives to bridging loans include:

Traditional Bank Loans

These can offer lower interest rates but often have stricter criteria and longer approval processes.

Mezzanine Financing

Mezzanine finance can be used in conjunction with senior debt to increase the total loan amount, albeit at higher interest rates.

Peer-to-Peer Lending

Some P2P platforms specialise in property development loans, offering another potential source of funding.

Joint Venture Partnerships

Partnering with investors can provide equity funding, reducing the need for debt financing.

When considering your financing options, think about your project’s specific needs, timeline, and risk profile. A mixed financing strategy, combining different types of funding, might be the most effective approach for some developments.

Need some help?

If you need a bridging loan or development finance then a specialist broker is a good place to start. You will get expert help and advice along with a wide range of lenders to choose from.

To get matched with a specialist broker, please call us on 0330 030 5050.

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