How property developers use bridging finance
Developers use bridging finance for a range of reasons when buying or developing property for a profit.
Many property deals are time sensitive. Sometimes, a property owner sells their home at well below market price to make a quick sale. This can mean that there is competition among buyers to purchase the property.
Sellers will often favour buyers who have the funds available so that the purchase can be completed quickly. A standard or a buy-to-let mortgage can take several weeks to arrange, whereas it is possible to for bridging loans to be available in a matter of days. Without bridging finance, the deal could turn into a lost opportunity.
Buying development land
If a developer wants to purchase land for a building development, a bridging loan can be used to purchase the development land. A loan may even be obtained before planning permission has been granted.
After purchasing the land, a mortgage can be used to build property, or a further bridging loan applied for.
Many developers buy cheap properties at auction that are in a bad condition. They can then refurbish the property and sell it on for a profit, or rent the property. A bridging loan can be used for this purpose then repaid after the building has been sold.
Property bought at auction must be paid for within 28 days of the winning bid, whereas a mortgage can take longer than 28 days to arrange, so a bridging loan can complete the purchase then repaid after the mortgage funds have been released.
If a developer has difficulties paying creditors, they may need to sell property to pay off their debts. If the property takes a long time to sell, the sale could be too late to avoid creditors taking legal action to recover their money. A bridging loan can be used to pay the creditors, then repaid after the property has been sold.
Buying building materials
On large development projects, the cost of building materials can be several thousands of pounds. If a developer cannot afford to purchase materials, a bridging loan could provide the funds.
Refurbishing uninhabitable property
Many lenders will not provide a mortgage for a property that is classified as uninhabitable. A bridging loan can pay for the necessary construction work, then afterwards a mortgage can be arranged.
A bridging loan requires security, which is usually in the form of property. Lenders will provide a loan based on a percentage of the property’s value. If there is enough value in the property, and the developer has a clear idea how the loan will be repaid and approximately when, there is a good chance of a bridging loan being accepted. A bridging loan is a short-term loan that needs repaying within 12 months or less.
Loans are available for developing both residential and commercial property.
To learn more about bridging finance, contact Ascot Mortgages. A bridging finance advisor here will look at your financial needs and find a suitable lender.