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Using Bridging Finance for Development Projects

Using Bridging Finance for Development Projects
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Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin23 Dec 2023

Using Bridging Finance for Development Projects

Property developments are one of the most common reasons to look for bridging finance. Some popular projects include:

  • Using a bridge to carry out building work where there is planning permission, but not the financing to fund the build.
  • Financing the end of a development to help the project be completed and sold or refinanced to raise capital.
  • Purchasing a land plot where fast completion is required.
  • Investing in auction properties for redevelopment.

These are just some of the regular development projects that Revolution finances Brokers through bridge lending. If you need an expedited solution, give us a call on 0330 304 3040, or email the team at [email protected].

How Does Bridging Financing for Property Development Work?

Bridging loans provide a bridge to cover the costs of capital required, and until the property is completed and can be remortgaged or sold at a profit.

This type of loan is flexible and can be used for small renovations through to complete builds.

It's worth remembering that bridge loans are higher in interest rates than mortgages, so it's important to acknowledge the loan's short-term nature and have a solid exit strategy to repay it.

What Deposit is Required for Development Bridging Finance?

The standard LTVs are 70% or 75, so you'll need a deposit of at least 30% to be accepted. If the development is considered a higher risk, you might need a higher deposit of up to 50%.

You can secure a 100% bridge loan without a deposit, but the lender will need substantial security to agree to this kind of risk exposure.

What are the Interest Rates on Bridging Finance for Property Development?

All bridge loans carry higher interest rates than mortgages. The exact percentage will depend on the lender and how they calculate the interest.

There are products where the interest is paid per month, and some where it is rolled up into the loan, and the debt consisting of the capital plus interest is repayable in full at the end of the term.

How Can I Get the Lowest Interest Rates on Bridging Finance for Developers?

Every lender will assess a bridge loan application against their own criteria, but the key elements include:

  • A good exit strategy that will cover the cost of repaying the debt - for example, having an agreement in principle for a remortgage when the development is complete.
  • Clean credit history is also a plus and brings down the risk level. You can get bridging finance even if you have adverse credit, but the rates aren't likely to be competitive.
  • If you have property development experience, this strengthens your application and will help negotiate down the interest rates.
  • The higher your deposit, the lower the LTV and the lower the risk. Applicants with a deposit of 40% or above will usually achieve the best interest quotes.

Can Bridge Loans Finance House Purchases for Development?

They can indeed - if time is essential, or you can't get a mortgage on the property. Some examples where bridging finance is the best option include:

  • Financing auction property purchases.
  • The property can't be mortgaged - for example, you can't qualify due to bad credit, or the home isn't habitable and therefore ineligible for a mortgage.

Bridge loans are only short-term, so are ideal where you want to finalise a deal quickly, then have time to remortgage, or need to raise the capital for an investment, and then sell the finished development at a profit.

Can I Use Bridging Finance for Developing a Buy to Let Investment?

You certainly can - particularly if you're buying a property at auction, bridge finance is significantly faster to organise than a buy to let mortgage.

The LTV is usually capped at 75%, so you'll need a 25% deposit, and most lenders will want to see an agreement in principle on a buy to let mortgage deal to repay the funds in due course.

Can I Get Bridging Finance for Developers as a Limited Business?

This option is also possible, and the rates are comparable to private bridge loan applications. Most lenders will ask for a personal guarantee from the company directors.

Many businesses incorporate a Special Purpose Vehicle limited company to manage property developments.

The lender will consider the development project, the value of the property, your deposit, and the credit record of the limited company as part of the regular assessment process.

However, the primary factor in a commercial development bridging loan is usually the viability of the development and how much the property is expected to be worth once work has finished. This valuation is the lender's security that the borrower will repay their debt.

What Income do I need for a Development Bridge Loan?

Bridging loans aren't as focused on your existing earnings, as they are on the viability of your exit strategy.

If you have zero income and apply for a bridging loan to purchase an investment project, you might be asked to demonstrate how you will finance the renovation works.

Regulated bridge loans, for a property you live in or will live in, need to see proof of income if you are reliant on a remortgage deal as your exit strategy.

How Quickly Can I Get a Bridging Loan for a Development Project?

This loan type is notoriously fast and can take just a few days to get in place - conditional on having a valuation or an agreement in principle to support your exit strategy.

Are Business Plans Mandatory for Development Bridge Loan Applications?

Not necessarily, but if you are developing a commercial property, then a lender might want to see your business plan to support the project's viability.

What is the Difference Between Development Finance and Bridging Finance?

In essence, these loans are very similar - but bridging finance is paid out in one lump sum, and development finance is released on stages at benchmarks in the build process.

Development finance can be used alongside a bridging loan, using the bridge to finance the property purchase, and development finance to cover the renovation or building work.

Lenders against development projects will review the property value - called Gross Development Value, representing the anticipated market value when the development is finished.

Interest rates vary - but for development finance, you need to be aware that you will need to cover inspection costs at every stage of the build before the lender releases the next tranche of funding.

As a positive, you only pay interest on the amount of development finance you have drawn down, not against the entire facility.

If you're interested in comparing development finance vs bridging finance for your project, get in touch with the team!

Development Bridging Finance Advice

Business finance broker are experts in bridging and development finance and can craft bespoke lending deals to offer you the fastest, and cheapest way to finance your construction projects.

Give us a ring on 0330 304 3040 or drop a message to [email protected] to arrange a good time to chat!

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.