If you are a property developer, you’ll typically need access to some form of finance in order to develop a property or properties and to then sell them on.
Access to that finance is typically by way of borrowing – against the security of the property itself – and that form of property development finance is usually provided by way of bridging loans.
The following is a brief guide to how bridging loans may finance your property development projects.
The principles of bridging loans
Bridging loans may be used for the acquisition and development of both residential and commercial properties. The bridging loan may be used to finance the complete development from the ground up, or it may be used for more modest renovation and refurbishment projects.
The key to understanding bridging loans is their short-term nature. Generally speaking, this may be for as short a period as just two weeks or as long as three years. The UK Bridging Market Study conducted by accountants Ernst and Young (EY) discovered that the average term of a bridging loan is currently 11 months.
Bridging loans are essentially temporary loans since they help you get from where you are now to where you want to be until the loan is repaid in full or a longer-term financing solution is found. Bridging loans – by definition – act as a “bridge” between the temporary solution and a permanent one.
In terms of property development, the illustration may become clearer if you think of the bridging loan as providing the finance to get the work done – the development or renovation of a building – and its ultimate onward sale or the arrangement of a mortgage if you intend to take longer-term ownership of the premises yourself.
The principal advantage of a bridging loan is the speed with which it may be arranged. A standard mortgage, for example, is likely to take at least several weeks to arrange – some lenders, with whom we do business here at Peak Business Finance, are able to complete the agreement and advance your loan as quickly as within just 14 days.
The price you pay
Bridging loans are specialist forms of finance – they are loans designed to meet specific short-term purposes. The risk to the lender is greater and the rate of interest is therefore also higher than you might pay for a standard, long-term mortgage.
Nevertheless, the market in bridging loans is highly competitive and with the experience and expertise of our advice here at Peak Business Finance you may be assured of what we believe are competitively-priced loans to suit your particular needs and requirements.
The risk you run
Bridging loans are not entirely without risk to you the borrower.
The principal risk lies in the very short-term nature of the loan. Unless you are able to repay the loan when it falls due – from the proceeds of the sale of the development or by your arranging your own long-term mortgage, for example – you face the expense of further borrowing and the prospect of arranging yet another bridging loan with which to repay the first.
If you fail to make the repayment, of course, you risk repossession by the lender of the development for which you secured the bridging loan in the first place.