For most property developers and builders, there is always a need for additional finances. This could be because of an upcoming project, refinancing an existing project, or the builder could have used certain funds to start a new development. In the world of property development and real estate building, there is always a requirement for funds. To continue working on new projects and ongoing projects, builders and developers need to ‘bridge the gap’ for a certain period. That is when bridging loans come into play.
What is a bridging loan?
First, let’s talk a little about the concept of bridging loans. In simple words, bridging loans are short-term loans used to ‘bridge the gap’ when there is a shortage of funds. Bridging loans are pretty easy to get, especially for well-reputed builders and experienced developers. Bridging loans are very flexible and the repayment terms can be altered to suit the borrower, and there are no strict repayment criteria as such. However, it is expected that the bridging loan is paid back within a year since these are short-term loans. So, bridging loans are highly beneficial and pretty effective for property developers and builders who are raising finance for property development for the short term.
How does a bridging loan work?
Usually, a bridging loan is secured against personal or business assets. So, for example, if a builder is taking on a bridging loan to start construction on a brand new project, the builder can mortgage an existing development or even a personal home or property in order to secure the loan. Usually, the maximum length of a bridging loan is 12 months. However, unregulated bridging loans or bridging loans from personal investors or friends can extend up to 18 months or so.
What is the difference between a bridging loan and a regular loan?
The one major difference between a bridging loan and a regular loan is that a bridging loan charges interest on a daily basis, whereas the interest on a regular loan is calculated on a monthly basis or annually. Another key difference between the two loans is that it is much easier and faster to get a bridging loan than a regular loan. To apply for a development loan or a mortgage, builders and developers need to show bank statements, project specifications, credit scores, and so much more. The process of getting approved for a bridging loan is much faster, and the criteria are not as strict. That is why many developers and builders often choose to opt for a short-term bridging loan to start working on their projects. At the same time, they wait to get approved for a long-term development finance loan. And, of course, bridging loans are more expensive than regular mortgages and loans. However, since these loans are taken out for a short period, it works out well in the long run.
How can you get a bridging loan?
First and foremost, a bridging loan can be taken out in the name of an individual or in the name of a limited company. To secure a bridging loan, a builder or developer needs to apply for a loan through a loan application. Next, the bank or lender will attempt to assess the creditworthiness of the borrower by looking at credit history, previous bank statements, payment history and so on. Banks usually look at these multiple factors to ensure that there is no previous case of bankruptcy or faulty payments. Also, banks and lenders will look at the years of experience in the development industry. For example, a development company that has been in this line of work for 20 years will find it very easy to secure a bridging loan from a bank.
In contrast, a new builder might have to show some extra paperwork before getting approved for a loan. Lastly, the total cost of the property is also considered. Usually, lenders and banks offer a 60 per cent loan to value ratio for commercial properties and an 80 per cent loan to value ratio for residential properties.
What can bridging loans be used for?
Developers and builders can use bridging loans for multiple things. The most common use of a bridging loan is to raise capital in order to start working on a new project. Bridging loans can also be used to buy new land or to acquire a new site. Also, builders and developers can use bridging loans for debt consolidation.
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