Short-term property bridging loans can help investors, developers, and individuals achieve their objectives in a variety of situations, such as acquiring a BTL, flipping a home, buying before selling, and finding a land deal that is too good to pass up.
But what is it exactly, how does it work, and how can you get your hands on it?
What does the term “short-term property finance” mean?
For both private and commercial investors, the property market has the potential to be significantly rewarding financially. However, purchasing or developing property might be difficult when capital resources are already invested in other assets. This is where property financing comes in, and there are various different sorts of property financing.
What are the different sorts of short-term property loans?
When you don’t have funds, it’s difficult to buy land or property, complete renovations, build larger developments, or self-build, especially if you need to spend rapidly to accomplish your goals.
As Stephen Clark, from UK bridging loan broker Finbri, explains: “There are quite a few different solutions and ways of accessing debt-based, or equity-based, financing. When you talk about them in general terms however, there’s really only two that are available – bridging loans and property development finance. Unless you’re developing the property the finance type most likely required is a bridging loan.”
Short-term property loans are accessible and come in a variety of shapes and sizes; here’s a breakdown of the most common varieties to consider:
A short-term loan secured by residential, commercial or mixed-use property is often referred to as a property bridging loan. The typical loan amount in the UK is generally no more than £10 million, but it can be much higher, going beyond £250 million. It takes 10 to 20 business days on average to complete. The debt is typically repaid all at once. Although the loan can be taken out for up to 24 months, most people typically do so for between 3 to 12 months. A realistic exit strategy, or a plan for how the borrower will repay the debt, is required for a bridging loan. A property sale or refinancing into a traditional mortgage package with a longer term, for example would be considered viable exits.
Urgent bridging finance – The primary difference with this product is that it can typically be executed in as little as 3 to 7 business days and has a maximum loan size of typically no more than £250,000. Again, its secured on property, but this time just on residential homes. In addition, the loan is paid in a single instalment. The loan can be used for up to a year. A viable exit strategy is also required for this type of financing.
Bridging loan refinancing – Almost the same product as regular bridging finance, but where the borrower needs to ‘rebridge’ the loan since they aren’t ready to pay it off yet.
Finance for development:
Property development finance – The loan is typically secured against residential, commercial, or mixed-use property, similar to ordinary bridging finance. There are however, different types of either debt based or equity based financing, and even a mixture of both for developers,
Loan amounts are normally up to £25 million but again they can be much higher. On average, it takes 2 to 6 weeks to complete. The main distinction between the two is the loan is repaid in one lump sum. The loan can be taken out for up to 24 months, however most developers only take it out for between 12 to 18 months. Property development finance requires a realistic exit strategy, or a plan for how the borrower will pay back the debt, for example, refinancing the development or through its sale. When the finance is equity based the lender will likely receive their return on investment only after the sale of the development.
Development loan refinancing – Almost equivalent to a bridging loan, but usually for larger loan amounts, where the borrower needs to refinance the development finance facility since they aren’t ready to exit it. Because the borrower is usually looking to sell the development in part or in its entirety, this loan is also known as a Development Exit Loan, Sales Period Loan, or Property Marketing Loan.
How much money can I borrow with a short-term property loan?
Apart from having a short term, these loans allow the borrower to raise funds ranging from tens of thousands of pounds to hundreds of millions of pounds.
A lender’s propensity to lend is influenced by a variety of factors, the most important of which frequently is security. With debt based property finance, the maximum loan value is determined by the available equity inside a single property or group of properties that the bridging and property development loan is secured against.
Furthermore, the loan-to-value (LTV) ratio of the available equity in the property versus its open market value is influenced by the property type, location, and condition. Some lenders would finance up to 80% LTV on a well-maintained residential property in a good location, while others will only lend up to 65% LTV on commercial or industrial properties, and land without planning will only attract LTVs or circa 50%.
Who can apply for this type of finance?
Any person or company could conceivably apply for a short-term bridging loan or development finance. The acceptance criteria are among the most straightforward in the loan sector because the finance is secured by a property or group of properties. If the loan is not paid when the term ends, the lender can recover their investment by selling the borrower’s assets. If you need a short-term property loan right away, a bridging finance broker is a good place to start.
If you’re unsure where to look for your bridging loan or property development finance there are many free to use directories available online. For example, BridgingLoan.Org.Uk – the UK’s association of bridging loan brokers and lenders offers the contact details of all the major bridging specialists in the United Kingdom.
Should I use a bridge loan broker or go directly to a lender?
Whether or not you should hire a bridge loan broker is mostly determined by your level of experience in accessing appropriate financing. Brokers charge a fee for finding the best deals, which should in theory offset some or all of their fees, and you’re unlikely to be able to match their rates going directly to a lender. If you know which lender you want to deal with and your transaction isn’t complicated, going straight to that lender will save you the fee you would have otherwise paid to a broker.
Top five reasons to use a bridging loan broker
- Brokers take care in understanding a borrower’s exact circumstances so that they can match the requirements to the right lender
- Brokers have access to whole of market (speciality lenders, family offices & private investors)
- Brokers know how to package up borrower’s requirements in a way that multiple lenders will want to lend against
- Brokers drive down lender’s rates by aiming to create competition between lenders
- Brokers can help borrowers sidestep common issues when seeking finance and assist with the entire application of the loan
According to Finbri, a specialist in arranging short-term property bridging loans, the main reason to use a bridging loan broker is that “brokers aim to completely understand a borrower’s particular situation and requirements so that they can match the borrower’s needs to the right lender” and therefore secure the best deal for them.