Complete guide on bridging finance and bridging loan for Property development and investment

Everywhere in cities and urban areas, development in property guarantees business growth and financial prosperity. Therefore, investment in the development of the property is a justified decision from all aspects. However, the availability of funds is a problem that can be solved by a bridging loan for property development.

If you have already acquired a mortgage on your property, then you can opt for 2^nd charge bridge loan, which is also available on different terms in the lending market.

In this post, we will present a complete guide on bridging finance. So, you can decide to choose this option in the lending market. Read this post entirely. It will educate you.

What is bridging finance or bridging loan for property development?

Bridging finance is a popular term in the lending market when a borrower needs to bridge the gap of funds on the occasion of property transactions. These finances are for short terms ranging from 12 months to 18 months. Generally, these loans fulfill the timing requirement for property transactions.

A regulated bridging loan for property development is a specific loan in bridging finance where a loan contract is protected under Finance Conduct Authority (FCA). It can be either first charge bridging loan or 2^nd charge bridging loan.

Different situations where bridging finance or a bridging loan for property development is needed

In the property market, securing a property needs the availability of funds that are stuck on another property. Most of the borrowers need bridging finance until the other property is sold. During that period, the bridging loan covers the finance requirement.

Below here are the examples where bridging finance comes handy.

• A property investor wants to seize an opportunity at an auction where he/she wants to buy the property, refurbish it, and present it as ready to buy option. Bridging finance helps the investor to purchase the property and undertake refurbishment.
• A property developer has completed all steps for his property line. During this project, he/she has to acquire different finance lines. Due to this, it has become difficult to manage the remaining steps. So, bridging finance helps the investor for funds until the sale of units.
• A part-time property investor needs to convert a commercial property into a residential one. But he/she is short of funds until a developmental loan is issued. Until that time, bridging finance brings cash flow for initial construction.

Open or closed

Bridging finance is called either open or close due to repayment terms. If all contracts have been signed, but payment is delayed for any reason. However, the timing of repayment of bridging loan is clear, then bridging finance is called a closed bridging loan.

On the other hand, if timings of repayment are not clear and subject to an open market, then bridging loan is called an open bridging loan.

How are bridging loans repaid?

Bridging loans are short term loans that are repaid when one property from transaction properties is sold or refinanced.

Who provides bridging finance?

There are many lenders who provide bridging finance or a bridging loan for property development.

Traditionally, banks were the prime lenders of bridging finance. However, due to the financial crisis, they have reduced such projects.

The role of bridging finance lenders is mostly performed by specialist property lenders who have developmental managers and case managers who help them to decide quickly. First charge bridging loans are easy to get. However, the 2^nd charge bridging loan is difficult to acquire.

In short, private companies, small investment funds, and high-net-worth individuals are prime lenders of bridging loans. They focus on high-interest deals.

Are bridging loans regulated?

Some bridging loans are regulated. But not all loans are regulated. If borrowers place his home as a security for loan acquirement, then it falls under Finance Conduct Authority’s rules and regulations. All houses of borrowers or immediate family members fall under the Mortgage Code of Business. That’s why a loan on the personal house is a regulated bridging loan for property development.

On the other hand, bridging loans for property developers and buy-to-let landlords are not regulated because these loans do not fall under FCA rules.

Requirements of bridging finance lenders

A bridging loan lender requires the following things in a borrower.

• A borrower needs to have a good credit history. If previous loan payments were paid on time, then a lender will issue the loan quickly. On the other hand, if credit history is bad, then acquiring a bridging loan will be difficult. In some cases, it would not be even possible.
• The lender will require property as security. Generally, lenders issue 65% of commercial property as a loan. If the borrower places a residential property, then the lender may issue 80% of a residential property.
• Lenders also want the first charge on the property. If you apply for a 2^nd charge bridging loan, then most of the lenders will not process your loan application.

Cost of a bridging loan

A bridging loan will be issued depending on risk factors. If you apply for an open bridging loan, then the risk for the lender will be high. So, you will be charged a high-interest rate, along with acute repayment plan terms.

On the other hand, if you apply for a closed bridging loan, then the risk for the lender will be less. Therefore, you can get low-interest rates.

Moreover, the cost of a bridging loan also depends upon payment terms. If you agree to pay back in 12 months or less, then you will be charged with less rate. On the other hand, if you intend to pay in 24 months, then your interest rates will go higher.

The time required for agreeing on a bridging loan

These loans are not decided in days. But it will take weeks. However, if you have all security requirements ready, then after agreeing on terms, you can get a bridging loan in less than a month.

Summary

If you are a property investor and progressing your investments, then bridging finance can help you get a solid position in the real estate market. Moreover, your cash flow will be organized, and you can expect revenue in a timely manner from your property transactions. Have a good day.