Have you got a lucrative property venture on the horizon, but aren’t 100% sure how you’re going to fund it?
Both seasoned developers and newbies in the field are quoted as saying that securing finance is one of the worst parts of the job; there’s nothing worse than having property development finance be the thing that stops a project in its tracks.
In the UK, development finance is growing exponentially, and there’s a lot for us to talk about. In this blog, our finance experts will guide you through the ins and outs of raising finance for property development, including the use of bridging loans and the role of property development finance brokers.
What is property development finance?
Firstly, let’s take it back to basics – here’s a quick intro to property development finance for the uninitiated:
Property development finance is a specialised form of funding designed to support real estate development projects. These projects can range from building new homes, renovating existing properties, or converting buildings for different uses.
This style of finance isn’t your typical mortgage. Instead, property development finance options are tailored to your unique needs, meaning it’s a far more flexible way for you to fund your project.
What types of property development finance are there?
There are a few key types of property development finance that you need to be aware of, starting with:
A finance option that is rapidly growing in popularity, bridging loans are short-term, interest-only loans that are designed to bridge the gap between your immediate financial needs and a longer-term property financing solution (usually a mortgage).
Bridging loans are offered for periods ranging from 3 or so months through to about 18 months, but this varies from lender to lender.
As bridging loans are approved quickly, they’re fantastic for ensuring that you don’t miss out on any opportunities. For example, we can usually secure bridging finance for clients within 24 hours, meaning that they can confidently seize a property as soon as it comes onto the market – no more missing out as a result of sluggish finance options!
In addition to this, bridging loans are great as they:
- Are super flexible – Bridging loans can be used for a wide variety of purchases, and they can be tailored to your needs.
- Can be used for property auctions – Bridging loans are often used to secure properties at auctions where speed is of the essence. As loans can be arranged quickly, you can get involved in the auction safe in the knowledge that you’ll have your cash.
- Work for renovations or conversions – If you plan to renovate or convert a property, a bridging loan can cover the initial purchase and refurbishment costs. Once the project is complete, you can refinance with a long-term loan or sell the property.
- Have manageable interest rates – Typically, bridging loans have slightly higher interest rates when compared to traditional mortgages. However, as they’re short-term loans, you’re unlikely to pay over the odds, they’re simply meant to bridge the gap between finance.
One key note for Bridging Loans: it’s essential that you have an exit strategy prepared. You need to know how you’ll pay off the remainder of the loan at the end of your term, be that through property sale, refinancing or other means.
Bridging loans and development finance are often mixed up. This is an easy mistake to make, as they’re both:
- Short-term loans
- Secured against land or property
- Often have no monthly repayments
- Are usually repaid through sale or refinance of the security property
The main difference is that property development finance is usually used to fund property development projects, and is only usually utilised during the construction phase, whereas bridging loans are usually used to cover property transactions that are urgent or time limited.
The two loan types often work synergistically. When refinancing after a bridging loan, many developers choose to transition into development finance pre-exit, if the property is not yet ready to sell.
The third option following a bridging loan is either a commercial or residential mortgage.
This option is used when a developer is keeping the building for ongoing usage. If you’re renting the property to businesses (or using it for your own business), then you’ll likely look to secure a commercial mortgage. If the property is to be rented as residential, or to be lived in by yourself, then it makes sense to transition to a residential mortgage.
Long-term mortgage options will have lower interest rates and significantly longer term. Often, bridging loans are used in the short term, buying you time to secure a good mortgage for ongoing usage.
Mortgages are only really used if you intend to keep the property. If you’re looking to sell, but need to extend your loan period, then development finance is what you need.
Light/heavy refurbishment loans
Finally, if you’re looking to refurbish a property, you’re unlikely to need a significant loan. That’s where light/heavy refurbishment loans come in.
Smaller loan sizes suit smaller projects, and can be used for:
- Heavy refurbishment – This constitutes major work. A refurbishment is considered to be ‘heavy’ when there is major structural work needed that costs more than 15% of the property value.
- Light refurbishment – This constitutes light work, as the name suggests. Any refurbishment that costs less than 15% of the property value and doesn’t need major structural work is considered ‘light’.
Go it alone, or use a property development finance broker?
As property development finance is a specialist finance option, we highly recommend talking to a specialist finance broker when considering your options.
Brokers like Bespoke often can have access to preferable rates, unique finance options and a broader range of specialist lenders available to them. If you go it alone, it can be very difficult to find a finance option that’s actually right for your project.
We’ve worked on property finance projects for years, and have secured finance for developers just like you up and down the UK. By working with our team of experienced brokers, you:
- Have access to finance significantly quicker
- Enjoy a preferential rate
- Won’t spend a penny extra (lenders pay broker fees!)