Real Estate Developers often need help funding their residential or commercial property development projects. Getting the right financing could expedite the purchase process and decrease the overall cost of borrowing if done correctly.
There are various short-term property development options on the market, but the best option available may be a bridging loan. Quite often a Bridging loan is obtained for property development and investment.
A bridging loan is a short-term loan that helps “bridge the gap” between one property transaction and another or until long-term, permanent financing gets secured for the property.
Residential Property Development with Bridging Loans
A bridging loan may be used to finance the entire development project from the very beginning, or also for simple renovation and refurbishment projects at the property. This type of loan is also useful for purchasing land for development if there is a solid plan for the development of the land. When a borrower has an immediate need for funding, bridging loans are ideal.
The average term of the loan is approximately eleven months, but can sometimes be as short as two weeks or extend to as long as three years. The loan will provide the funds needed for the renovation or residential property development until you can either sell the property for a profit or arrange for a permanent, conventional mortgage for the property.
The application process is also usually a lot simpler than the method used for traditional and conventional lending. Applications can be completed within 5-14 days, which is ideal when funds are needed quickly.
With typically no monthly payments required, a bridging loan can be used to raise capital when cash flow is tight and then repaid when you are comfortable and have the assets or funds available to repay the loan at the end of its term.
Loans can also be offered without a deposit required and have flexible lending criteria. Developmental properties are often purchased undervalue so that the lending can be based on the full or future value of the property. Bridging loans can commonly be used to buy properties that are uninhabitable or ineligible for conventional lending before rehabilitation.
The main advantage of using a bridging loan for residential property development is the speed at which it can be applied for and disbursed.
The main disadvantage is that the risk to the financing lender is much higher than with a conventional loan so that the interest rate may be much higher than those used for traditional mortgages and loans. It is because the requirements and securities needed for a bridge loan are much more relaxed than with a conventional loan, so the risk for the lender is much higher.
Bridging Loan Examples for Developers
An excellent bridging loan example is utilising a bridging loan for a residential build. It is because lenders don’t have specific requirements on the land or work done before they release the funding, so the financing is available immediately for your use on property development.
It allows you to have access to a large amount of funding within a short time, and ensure that you can build your home or residential property development without any delays due to funding.
In the example of a land development purchase, if you’ve already purchased the land and now funds are needed to cover the development costs, a bridging loan might be used to finalise the residential property development so that you can then finalise developments and sell the property to pay back the loan.
Bridging loans can also availed towards purchasing a development site while still applying for development consent and approvals.
A real estate developer who is looking to develop a property and then to increase its value before selling the property, but does not have the necessary funds to finance the development, so he finds a lender to give him £250K with a 12-month financing term.
However, after some delays and struggles with the builder in charge of the development, the developer then needs to find a new builder to complete the project development. As a result of this delay and changes, the developer is not able to sell the property and repay his original lender within the 12-month financing term.
In order not to default on the loan, the builder then obtains a bridging loan. The loan is secured quickly and financed within two weeks, and the final amount needed to pay the developer’s original lender was paid along with any interest that accrued. The developer was then able to complete the project development with his new builder and raise the property value once completed for a final sale and to pay and exit his bridging loan.
Another bridging loan example is If you’re building your own home, then using a bridging loan can be a low-cost way to finance the build. The security in residential bridging can either be a property you own or property you intend to buy.
Bridging Finance Lenders
Bridging finance lenders usually offer bridging loans for the purpose and renovation of property as a form of property development finance. The loans can be used for both commercial and residential properties and can be used for total property development, or for just adding a bathroom and other simple renovations.
The market for bridging loans is highly competitive, as their popularity rises. Even with higher interest rates, the lenders are competing with the speed they can consummate the loans in the terms offered. Some bridging finance lenders are also reducing interest rates to provide a competitive edge. To succeed lenders must have an edge from their competition. Most do so by creating loan structures that match their clients’ needs.
With offering flexible lending criteria, bridge loan lenders don’t need to worry about traditional lending benchmarks such as income, affordability, and credit history. Instead, they mainly look at the value of the collateral uses and the exit plan in place.
Traditional loans can take several weeks or sometimes months to process and finalise. When it comes to property development, timing is of the utmost importance, and bridging finance lenders understand this. They can process and close their loans with days or weeks and without delays.
Bridging finance lenders also are less restrictive on the requirements to obtain the loan. Traditional lenders will review a property developer’s portfolio and analyse their portfolio to assess whether or not they can afford loan repayments.
Bridging finance lenders differ in this aspect as a low credit score is not a deterrent, and also the interest can be rolled into the loan so that repayment terms do not immediately begin and there are no monthly payments towards the loan.
The borrower can then start property purchase and development immediately without having to worry about repayments until the end of their loan term.
Some bridging finance lenders may charge a fee for the arrangement of the loan and also miscellaneous administration fees. These charges vary from lender to lender, and most lenders offer a case-by-case basis on what they can provide and deliver for the borrower. Bridging loans can often be tailored to suit any borrowers needs on time and cost, which is why they are often the best available option for residential property development.
Part of a new, innovative way of lending is peer-to-peer lending. Some peer-to-peer lending companies even offer bridge loans for private, residential, and commercial uses.
Peer-to-peer lending are loans that are funded by private investors, and some suggest they can be secured even faster than a typical bridging loan because the loans are approved and underwritten, then made available for investment immediately.
The total loan costs must always be considered before applying. Sometimes a lower interest rate may come with a more substantial exit fee, fund management fees, or other hidden costs.
The borrower must be careful that they can repay the loan when it falls due; otherwise, they may risk repossession of the residential development property or high costs that may require a second, additional bridging loan used to repay the first. During the agreed term, the loan is usually secured against the equity in the property purchased.
If you’re planning on selling the purchased property as your exit strategy for the loan, you should ensure that the term of the loan gives you sufficient time to secure a buyer and for sale to be completed properly. Otherwise, you could end up selling the property at a discount and for less profit than expected.
If you plan to refinance into a long-term loan to exit the bridge loan, you should ensure that you are confident that your application will be approved, to avoid delays or issues with repayment once your bridge loan term is due.
A valid exit strategy must be in place for any loan obtained. The best exit strategy for residential property development using a bridging loan would be to obtain a long term commercial mortgage which would pay off the bridging loan.