Bridging loan of property development is now one of the hottest funding sources to those developers who require quick and composite cash. Bridge financing can take you through to financing your project, as well as purchasing a piece of land, commencing a new construction, renovating an old property, and any other project that may require short term financing.
What Is a Bridging Loan on Property Development?
A bridging loan is a short term loan which is meant to fund an immediate project dealing with property. They are loans that usually take a period of between 3 to 24 months depending on the lender and the extent of the development.
The important characteristics of Bridge Financing:
Quick release and fast approval of funds.
Jackets targeting temporary property requirements.
Flexible repayment terms
It is appropriate to land, residential, and commercial projects.
The mortgage is collateralized against more than one property.
When Developers Use Bridging Loans?
Bridging loans are normally used by property developers in cases where they:
Need to secure land quickly
Buy property at auction
Finance a renovation or expansion.
Turn a business property into a home.
Begin or end construction work.
Long term mortgage approval cover delays.
Disposing equity in other property.
The Way A Bridging Loan To Develop A Property Works
The bridge financing concept can assist developers in making shrewd and opportune funding choices.
Step-by-Step Process
Initial Application
A developer provides the information about the project, price of the property, and capital needs.
Valuation and Assessment
Lenders evaluate the feasibility of the project, exit strategy and security provided.
Approval & Terms
In case it is approved the lenders provide terms such as the amount of the loan, the interest rate and the repayment structure.
Funds Released Quickly
The money can be disbursed as early as 3-10 days compared to the traditional mortgages, which can take a long time.
Exit Strategy Execution
- Through the repayment of the loan, developers pay.
- sale of the finished property,
- refinancing through a long term development finance loan, or
- dealing with equity of a different project.
Bridge Financing Types Available
Closed Bridging Loans
Where there is a set completion date or exit strategy of the project.
Open Bridging Loans
Developers that require flexibility and who do not have a finalised exit date.
Development Bridging Loans
To be used to do refurbishments, extensions, conversions, or ground-up constructions.
Refurbishment Loans
The perfect choice of property to be refurbished (either light or heavy).
Advantages Of A Bridging Loan To Develop A Property
Bridge financing has certain benefits which are incomparable to those of traditional funding.
Fast Access to Capital
Opportunities in the property business are fast. Bridging loans enable developers to obtain deals earlier than their rivals.
Flexible Usage
You can use the loan for:
- Land acquisition
- Acquisition of non-residential property.
- Property conversions
- New build projects
- Refurbishment and renovation.
- Paying contractors
- Resolving funding delays
Short-Term Commitment
Loans are normally on short term basis thus you only borrow as long as your project takes.
Higher Lending Potential
Since the loan is secured by property, the lenders can provide a higher loan-to-value (LTV) than the traditional financing.
Bridge Financing Eligibility
Flexible though they are, bridging loans still demand some of the important information.
What Lenders Look For
- Value of security property.
- Construction/refurbishment plan.
- Experience of the developer
- Financial stability of Borrower.
- Estimated project costs
- Realistic exit strategy
Common Exit Strategies
- Final sale of the finished property.
- Long-term development refinancing.
- Rental income refinance
- Portfolio restructuring
With an exit strategy, chances of approval are better and the interest rates might be lowered.
Expenses A Bridging Loan On The Development of A Property
Although bridging loans are fast and offer flexibility, the cost involved should be well understood.
Typical Costs
Interest Rates: Monthly, on a per-month basis.
Arrangement Fees: Typically 1-2 per cent of the amount of the loan.
Valuation Fees: Relies on the nature of the project.
Legal Fees: Borrower and lender pay.
Exit Fees: There are lenders that pay an extra charge upon completion of the loan.
Interest Roll-Up Option
The lenders give an option to roll up interest many lenders enable developers to only make payments when the project becomes operational, which discourages the cash flow pressure in a month.
When to Consider a Bridging Loan?
Bridge financing is suitable when you:
- Have to get money sooner than a mortgage company gives it.
- Is it a purchase of property which is not mortgage ready.
- Have a development project to begin or to finish.
- In need of temporary funding.
- Need to capitalize on an opportunity that is time sensitive.
FAQs
What is the speed of taking a bridging loan?
Bridging loans are usually disbursed by most bridging lenders in 3-10 business days, depending on the valuation and legal approvals.
Is experience in property development necessary?
Not always. Others lenders would allow first-time developers when the project is well-compounded and has a good exit strategy.
Is it possible to take a bridging loan to purchase land?
Yes. Bridging finance is usually employed in buying of land that would be constructed soon.
What is the maximum lending period?
Categories in most cases are between 3 months and 24 months, depending on the lender and complexity of the project.
What will be the effects in case my exit strategy fails?
In case of delays, you can renegotiate, or refinance your loan with a different lender. Nevertheless, one should think through not to incur extra expenses.