Short term property loans can assist investors, developers, and individuals achieve their goals in various situations, including securing a BTL, flipping a home, buying before selling, and spotting a land offer too good to pass up.
But what exactly is short-term property financing, how does it function, and how can you get your hands on it? If you want to find out, continue reading!
The property market has the potential to be a profitable business venture for both private and commercial investors. When resources are already tied up in existing assets however, acquiring or developing property might be challenging. This is where property financing comes in, and there are several types of property financing that can help.
When you don’t have funds, it’s difficult to buy land or property, complete renovations, build larger developments, or self-build, especially if you need to spend rapidly to accomplish your goals.
As Stephen Clark from Finbri, a short-term property loan broker explains, “There’s quite a few different nuanced finance products out there. However, when you boil them all down to basics there’s really only two that are available – bridging finance and property development finance. Unless you’re developing the property, the finance type most likely required is bridging finance.”
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Short-term property loans are accessible and come in a variety of shapes and sizes; here’s a breakdown of the most common varieties to consider:
A short-term loan secured by residential, commercial, or mixed-use property or land is referred to as property bridging finance. Loan amounts are normally up to £25 million, although they can be much more. On average, it takes 10 to 20 business days to complete. The loan is repaid in one lump sum. The loan can be taken out for up to 24 months, however most people only take it out for 3 to 12 months. Bridging finance requires a realistic exit strategy, or a plan for how the borrower will pay back the debt. For instance, a property sale or refinancing into a typical mortgage package with a longer term.
Urgent bridging finance – The primary difference with this product is that it can typically be executed in as little as 3 to 7 business days and has a maximum loan size of typically no more than £250,000. Again, it’s secured on property, but this time just on residential homes. In addition, the loan is paid in a single instalment. The loan can be used for up to a year. A viable exit strategy is also required for this type of financing.
Bridging loan refinancing – Almost the same product as regular bridging finance, but where the borrower needs to ‘rebridge’ the loan since they aren’t ready to pay it off yet.
Property development finance – The loan is secured against residential, commercial, or mixed-use property, similar to ordinary bridging finance. Loan amounts are normally up to £25 million, although they can be much more. On average, it takes 10 to 20 business days to complete. The main distinction between the two is the loan is repaid in one lump sum. The loan can be taken out for up to 24 months, however most people only take it out for 3 to 12 months. Requires a realistic exit strategy, or a plan for how the borrower will pay back the debt. For instance, a property sale or refinancing into a typical mortgage package with a longer term.
Development loan refinancing – Almost equivalent to a bridging loan, but usually for larger loan amounts, where the borrower needs to refinance the development finance facility since they aren’t ready to exit it. Because the borrower is usually looking to sell the development in part or in its entirety, this loan is also known as a Development Exit Loan, Sales Period Loan, or Property Marketing Loan.
These loans, in addition to having a brief period, allow the borrower to raise funds ranging from a few thousand pounds to hundreds of millions of pounds.
A lender’s willingness to lend is determined by a number of criteria, the most important of which is often security. All bridging and property development funding is secured against property, and the maximum loan value is determined by the available equity inside a single property or group of properties.
Furthermore, the property type, location, and condition all influence the loan-to-value (LTV) ratio of the available equity in the property versus its open market value. Some lenders may offer up to 80% LTV on a well-maintained residential property in a desirable location, while others would not grant more than 65% LTV on a commercial or industrial property, and land without planning will only lend up to 50% LTV.
Although 100% bridging loans are achievable, the 100% refers to the loan amount requested by the borrower rather than the actual LTV. If a borrower needs £80k in bridging loan and has one property with an open market value of £100k but only £90k in equity, the most they can borrow is 80% of the £90k. That’s a total of £72,000. As a result, there is an £8,000 shortfall. If the borrower owns another residential property with at least £10k in equity, they might combine this security with the first home to raise the remaining £8k needed to reach their £100k goal, effectively securing a 100% loan.
A short-term bridging loan could be issued to anyone or any firm. Because the loan is secured by a property or group of properties, the acceptance criteria are among the most straightforward in the finance industry. If the loan defaults and is not paid when the term ends, the lender can take use of the loan’s assets to recoup their investment. A bridging finance broker is a smart place to start if you need a short-term property loan immediately.
The primary reason to employ a bridging loan broker, according to Finbri, a specialist in arranging short-term property loans, is that “brokers take care in understanding a borrower’s particular circumstances so that they may match the requirements to the suitable lender” and therefore achieve the best deal for the borrower.
Whether you should use a bridge loan broker is really dependent on your level of expertise in sourcing the right kind of finance. Brokers charge a fee for sourcing competitive deals that should offset their fees and you’re unlikely to obtain the competitive rates they can. However, if you know which lender you want to use and your deal isn’t complex then going direct to that lender will save you the fee you would have spent with a broker.
Top five reasons to use a bridging loan broker
- Brokers take care in understanding a borrower’s exact circumstances so that they can match the requirements to the right lender
- Brokers have access to whole of market (speciality lenders, family offices & private investors)
- Brokers know how to package up borrower’s requirements in a way that multiple lenders will want to lend against
- Brokers drive down lender’s rates by aiming to create competition between lenders
- Brokers can help borrowers sidestep common issues when seeking finance and assist with the entire application of the loan
If you’re considering approaching either a broker or a lender then visit the UK’s bridging loan brokers and lenders directory BridgingLoan.org.uk – and it’s 100% free to access.