Bridging Finance for Property Development and Investment

Bridging finance is a short-term loan, typically lasting 3 to 18 months, which covers the period in between one property-related transaction and another.

Advantages of bridging finance

The need for bridging finance arises when the purchase of one property needs to be completed before the sale of another one is finalised. In property development and investment, it is also common for bridging finance to be used as an interim facility to quickly secure a property, generate cash flow, or fund refurbishment work while obtaining long-term finance.

Some case studies:

• A property investor wants to purchase a property at auction. The intention is to refurbish the property before renting it out, at which stage long-term finance would be arranged. Bridging finance is used initially to complete the purchase and refurbishment works.
• A property developer has taken their project to practical completion. During the development, they have accrued several different lines of finance, which have become unwieldy to manage and are proving more expensive than they need to be. A short-term bridging loan is used to consolidate the borrowing into one place until the properties are sold.
• A part-time property investor needs to generate some short-term business cash flow while obtaining planning permission to convert a property from commercial to residential use. A bridging loan is taken out to provide some pre-construction finance until a development loan can be agreed once planning has been granted. 

Bridging loan repayment

Bridging loan finance is repaid when some of the properties in the transaction are sold or refinanced.

Who provides bridging finance? 

There are several lenders who offer bridging finance. 

Traditionally, bridging finance, like most other forms of lending, was the preserve of the pillar banks, but since the financial crisis those banks have a reduced appetite for new projects.

In Ireland and the UK, alternative lenders have stepped up to fill the void left by the pillar banks. 

The market consists mainly of small investment funds, private companies, and high-net-worth individuals who focus on making above-market returns by providing high-interest loans.

Bridging finance lender requirements

When it comes to deciding whether to lend or not, any reputable lender will firstly want to satisfy itself about the creditworthiness of the borrower. A good credit history and previous experience in property development will help secure quick agreement and the lowest rates.

Your lender will want a first charge on the property that is to be refinanced or sold.  

The cost of bridging finance

Loans are priced according to the risk the lender perceives and the revenue it needs to generate to make a profit.

Bridging finance is generally considered to be more risky than other types of lending. However, because the money is only lent for a relatively short period of time, the real income for the lender from interest alone is quite small, even if the headline rate looks quite high.  

For this reason, it is normal to see an interest rate plus an arrangement fee quoted. There could also be security fees, legal fees, valuation fees, and early repayment fees. All of these are legitimate and it’s important that you understand the full costs of any agreement that you plan to enter into before signing. 

Property investment often generates minimal or no income until the project is complete, so finance costs need to be factored into budget and cash flow projections. Interest roll-up, where interest is repaid at the end of the term rather than in regular instalments, is sometimes possible for shorter-term arrangements. Thrive Financial can advise and obtain the best possible rates for our clients.

Turnaround times for bridging loans

The normal process is to first agree the credit and the terms in principle, which can happen within a few days, before moving on to complete the valuations and security. The lender will need to confirm initial valuations and then complete the security arrangements before the money can be released.

The whole process for agreeing a bridging loan is likely to take weeks as opposed to days, with the overall turnaround time dependent on the size and complexity of the finance loan.

Summary

Bridging finance is a flexible, short-term facility that could provide you with the vital finance needed to move your property investment or development project from one stage to the next. The major advantage is that the funding can be obtained quickly.

We’re here to help

We hope this guide will help you prepare a successful bridging loan application as efficiently as possible. Every lender has its own specific criteria for bridging finance, so if you would like to have a confidential chat about how best to fund your next commercial property deal or to find out about the best commercial funding options available to you, please call us today on 087 9344655, email us at info@ie.thrivefinancialconsultancy.com, or visit our website.