Bridging loans chapter 2.
A bridging loan is a short-term loan used by property developers to fund their projects. There are several different types of bridging loans depending on your specific requirements.
Types of bridging loans
Closed bridging loans
There is a set date for the loan to be repaid which has been agreed by both parties. These types of bridging loans are preferred by lenders because they can be more certain of loan repayment. Due to the lower levels of risk, they typically have lower interest rates than open bridging loans.
Open bridging loans
The borrower proposes an exit plan to repay the loan but there is no set date for loan repayment. This type of loan is often preferred by borrowers who desire greater flexibility. The higher level of uncertainty surrounding loan repayment attracts higher interest rates.
First charge bridging loans
This type of bridging loan provides the lender with a first charge over the property. In the case of a default, the first charge lender will have priority over all the other lenders and will receive their money first. First charge bridging loans attract lower interest rates than second charge bridging loans because the level of risk is reduced.
Second charge bridging loans
The lender is given a second charge over the property. A second charge lender will only be able to claim their payment from the borrower once the first charge lender has been paid. These loans rarely last longer than 12 months. As they carry a higher risk, they have higher interest rates than first charge bridging loans.
How developers can use bridging loans
Property developers can use bridging loans in a number of different ways, including using bridging loans to acquire a site, raise capital, refinance a property and for buy-to-let property development.
Bridging loans to acquire a site
Lenders usually define a ‘mobilisation period’ within the loan. This period can be as little as one month. Due to the little time available, borrowers often don’t have enough time to complete their planning application and secure permission to start work.
In such circumstances, bridging loans can ‘bridge’ the gap between buying the site and development finance.
When attempting to secure capital, bridging loans are the perfect option. They are simple to complete, allowing you to quickly raise capital for property development.
When a project is completed, a bridging loan can help to lower your costs. Bridging loans allow you to secure funding for investment in new sites without having to wait for your capital to be released from your current project.
Bridging loans for buy-to-let property development
You can secure a bridging loan for a buy-to-let property development. Some lenders will be able to supply capital for the bridge loan and buy-to-let mortgage. This type of loan is called bridge-to-let. For this loan the LTV is a maximum of 75%.
In each of these scenarios, it is important for the property developer to consider their exit strategy (how they will repay their bridging loan). This is essential as bridging loans are very difficult to rebridge. See our article on exit strategies to understand how to form a detailed exit plan.