Bridging finance for property development

With the real estate industry turning over £72.81B in 2023 and employment for the market reaching 575,000 people, it’s no surprise many are looking to launch, grow, or expand their property development projects.

But how do property developers fund their projects?

Enter: bridging loans.

What is bridging finance for property development?

A property development bridging loan is a short-term loan designed to bridge the gap between funding. Bridging lenders offer investors the ability to make monthly interest-only payments for a period of months, usually not surpassing a year or two. Borrowers then repay the full loan at the end of the loan term when further funding has been established, for example, in the form of a mortgage or from the completion of a sale.

Example: Let’s say you have a plot of land you’d like to build on. The build would take one year and you already have a buyer lined up for the sale once the project is complete. You could take out a bridging loan to fund your construction project, use the funds to work on the project while you pay interest on a monthly basis, and then repay the full amount once the buyer sends the funds upon completion of the property.

What’s the difference between a bridging loan and a commercial mortgage?

A commercial mortgage is a longer term loan, usually spanning 15-30 years, where you pay for the property over the course of the loan (unless you have an interest-only mortgage, in which case you repay the interest and then pay for the loan upon completion of a sale or once you’ve secured another mortgage). On the other hand, unlike a commercial mortgage, a bridging loan is short-term, with term lengths running between several months and a year or two. You repay the full loan at the end of the term. Interest rates are usually higher for bridging loans, they may carry more risk, and you will usually need an exit plan to apply.

Benefits of bridging loans for property development

• Speed: Bridging loans are popular in the commercial real estate world since, due to their short-term nature, they are generally faster to gain approval for, providing borrowers with quick access to funds.

• Flexibility: Bridging loans can be more flexible, both to apply to and to use. For instance, some bridging loans make it possible to purchase a property at auction as a property developer without having decided on the property in advance.

• Secured: Since bridging loans are usually secured against the asset, they can come with higher limits, enabling you to gain greater access to funds than, for example, you might find with a revolving credit facility or business overdraft.

Bridging loan drawbacks

• Higher interest rates: Due to their short-term nature, bridging loans are riskier for lenders to take on, as there is less time given for the borrower to repay the loan, which increases the chance of default. For that reason, bridging loans can have higher interest rates.

• Greater risk: With a mortgage or long-term business loan, if an expected sale isn’t completed you may be able to extend the term length. Bridging loans, on the other hand, are short-term, so payment will usually be expected within approximately 12 months, making it essential that your exit plan holds through. With regards to risk, you may also want to consider whether a bridging loan will impact any future mortgage applications. 

• Loss of property: Your property may be repossessed if you default on a loan. Ensure you have a strong plan and have considered all possible risks before entering into a bridging loan agreement.

Property development funding eligibility

To be eligible for a bridging loan for property development, you’ll likely need:

• An exit plan: An exit plan outlines how you plan to repay the loan. Example: Let’s say you intend to turn a large property you own outright into a block of four residential properties. Your plan is to sell the apartments one-by-one and that’s how you intend to repay the bridging loan. In this instance, your exit plan should contain the above information along with the development timeline, final value of the flats, and the sale and marketing plan.

• Company information: You’ll likely need to submit information about your company to be eligible. This could include your history with property development finance, your financial standing, and any commercial properties you hold.

• Property information: The property will also have an impact on eligibility. The less of a risk the lender feels they’re taking on with your project, the more likely they are to approve the loan. Consider the project’s viability when applying and be sure to outline any unique qualities you feel your project benefits from.

How to apply for a bridging loan with Funding Options by Tide

• Look inward: Decide exactly what you want to borrow and for how long.

• Make an exit plan: How do you plan to repay the loan at the end of the term? Write down a detailed plan.

• Make a project plan: Write down your strategy for the project. Which contractors will you hire? How much will they cost? How long will the development take you?

• Fill in the form: Let us know how much you want to borrow and fill in your company information via the short application form. We’ll let you know whether or not you’re eligible for our service. If you are, we’ll send over any lenders we match you with.

• Consider: With your quotes in hand, consider carefully the terms each lender is offering.

• Apply: If you decide to go ahead, it’s time to apply. Submit your details and send them your documents. Our support team can help you here.

• Wait: Some lenders decide within a matter of minutes, others may take a day or longer.

• Start the project: If your application is approved, funds will be released.

• Repay: Make your monthly or weekly repayments in a timely manner and be sure to repay the full amount by the deadline. If you find yourself struggling with repayments, contact the lender.

Do I need a lawyer?

Yes, it is probably a good idea to have your lawyer look over any documents before signing, including your bridging loan agreement with the lender and any personal guarantees you may be asked to sign. The lawyer can also help advise you on whether or not you are taking any unnecessary risks, but remember, you are your best advisor, if something doesn’t feel right, walk away.

Are there early repayment charges?

Usually, no. You can repay the loan as and when you find further funding. However, there are exit fees, which tend to range from 1-2% of the loan amount.

Do I need a deposit?

Yes, it is highly likely you will need a deposit. You usually need around 25% for commercial projects. It’s possible you may find a bridging loan that covers more than 75% of the value of the property, but these tend to come with higher interest rates and carry greater risk. 

Example: If you want a bridging loan to cover property development in the amount of £60,000 and the final value of the property would be £60,000, you would need a deposit of £15,000.

What is LTV: You may come across the term LTV. This stands for ‘loan to value’. The loan to value ratio is the percentage of the property you’ve sought funding for. For example, if a property costs £100,000, you pay a deposit of £25,000, and you gain funding in the amount of £75,000, the LTV would be 75%. 

Are there additional fees beyond interest? 

Yes, you will likely be charged arrangement fees (this is a cost charged by the lender for setting up the loan) and exit fees. You may also have to pay for a valuation of the property. You could also be charged broker fees.

How much can I borrow?

You may find it hard to find funding for more than 75-90% of the value of the property. We help eligible borrowers gain between £1,000 and £20M in funding from our network of lenders.

What happens if I can’t repay the loan?

The consequences of not repaying the loan are severe and should be carefully considered before entering into a bridging loan. You could lose the property, you’d likely be charged additional fees and further interest, your credit score would take a hit, and you may be personally liable for the repayment even if you applied as a limited company. When applying, consider your exit strategy carefully. 

How long does it take to get approved?

Bridging loans can be completed within a matter of days. If you’re concerned about meeting a timeline, get in touch with our support team and we’ll see if there’s anything we can do to help.

Find a bridging loan to support your property development project

We provide expert support to borrowers looking for bridging loans. Our team is intimately aware of what’s involved in property development projects, including how vital deadlines are. Get in touch with us by clicking the link below and we’ll let you know if you’re eligible for a bridging loan.

Find a bridging loan for property development.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.