How to use a bridging loan to finance property development

Business Insights

If you’re building your own home from scratch, renovating an existing property or are an experienced developer and don’t have enough capital to cover all of your costs, a bridging loan could be exactly what you’re looking for.

Trying to secure borrowing for a property that only exists on a piece of paper can be difficult, particularly if it’s your first time. This is where bridging finance can be a very useful form of lending, helping you get your project off the ground.

What is a bridging loan?

Bridging loans are a short-term form of finance designed to assist you to ‘bridge’ the gap between point A - usually the start of a development project - and point B - when the property has been completed and is ready to either move into or sell.

How do they work?

A lender will offer a bridging loan linked to the length of time the development work is expected to take with terms available usually from between one to 12 months (longer terms can be available).

The key factor for all bridging loans is agreeing from the outset a clear exit strategy (to repay the loan) with a lender, which would usually be either:

  • Refinance existing lending over a longer period when the property is complete
  • Sell the property and repay the loan with the proceeds

What type of property development work could I use bridging finance for?

Bridging loans are an extremely flexible form of finance making them a popular solution for both small and large scale property renovations.

Providers can offer bridging loans to either commercial or residential borrowers for projects ranging from complete new-build properties or the renovation of an existing home.

Why would a bridging loan be a good option for property development?

Bridging finance can usually be arranged and in place much more rapidly than other forms of lending, therefore, if you need to arrange borrowing in a hurry in order to move quickly on a particular project a bridging loan could be the most suitable option.

In some circumstances, a bridging loan can be in place within one or two days, if you have a clear exit strategy agreed and in place, whereas other forms of lending, such as mortgages, can take weeks to complete.

How do bridging loans differ from mortgages?

There are a number of key differences between bridging loans and both residential and commercial mortgages, namely:

  • Term. Bridging loans are usually available for between one to 12 months or up to a maximum of 36 months depending on the project
  • Repaying the loan. A clear exit strategy is required for all bridging loans from the outset - either refinance once the development is complete or sell the property
  • Rates and fees. Interest rates and charges for bridging loans are usually higher due to the overall risk of financing projects from the outset
  • Asset security. Bridging finance is only available on an interest-only basis, therefore, lenders will require adequate security to cover the lending

How much can I borrow for a bridging loan?

The sky’s the limit really. Bridging finance is unregulated, therefore, lenders have no firm rules on the amounts they can consider. A robust exit strategy and clear plan to complete the property development on schedule are key regardless of whether you’re applying for a large or small loan.

Someone asking to borrow £50,000 but with a vague exit strategy is more likely to have their application declined versus someone looking to borrow £500,000 with a coherent plan for how the money will be repaid.

Can I borrow the whole amount or will I need a deposit?

Whilst borrowing 100% of the entire amount required to complete a property development can be done in exceptional circumstances (usually with sufficient asset security), most lenders require a deposit of between 30-35% for this type of lending.

The higher the loan to value (LTV), the higher the risk a lender is being asked to take and, as a result, will mean a higher rate of interest charged.

How can I secure the best interest rates for a bridging loan?

The general rule of thumb for any form of lending is the best interest rates are generally offered, based on the strength of an application.

Bridging loans are no different, however whereas affordability plays a major factor with traditional lending, the main areas that will determine the interest rates for bridging finance would be:

  • Deposit - A higher deposit of between 30%-40% would give a lender much more confidence and entice them to offer more competitive rates. The higher deposit you can include, the better rate you should be able to get.
  • Clear exit strategy - This is crucial. A strong exit strategy, either with a pre-agreement of a sale of the property or refinance would make an application much stronger.
  • Experience - The more experience you have in property development, the more confidence a lender will have in your application. Don’t lose hope though if this is your first time, lots of lenders will still consider your request.
  • Credit history - If you have a poor credit record a lender may not have the same level of confidence that you can deliver on your exit strategy, therefore, this may influence the level of interest charged.

Bridging lenders will look at every application on a case by case basis as there can be lots of different permutations to consider. The factors outlined above will play an integral part in securing the best interest rates for your loan.

Would development finance be a better option than a bridging loan?

Development finance is quite similar to bridging finance, the key difference being how the funds are distributed. A bridging loan releases all the funds required at outset, whereas with development finance the funds are released during stages of a project.

With development finance interest is only charged on the portions of the loan that have been released, therefore, this can affect the overall cost.

Large scale new-build projects may find this type of finance more suitable, however, in reality it’s not unusual to see both bridging loans and development finance used in tandem, particularly if further funds are required to complete the property build.