Bridging and Development

Bridging Finance

Bridging finance is a short-term loan, typically lasting 1 to 18 months, used to "bridge" a financial gap until longer-term funding is secured or a property is sold. It is commonly used for property purchases, refinancing, or funding urgent transactions where speed is critical.

• Purpose: To provide immediate capital for property acquisitions, renovations, auctions, or to cover cash flow gaps.
• Loan Term: Usually 1–18 months, though some lenders offer up to 24 months.
• Loan Size: Ranges from £50,000 to £50 million or more, depending on the lender and project.
• Security: Secured against a property or other assets, often with a first or second charge.
• Repayment: Typically interest-only, with the principal repaid at the end of the term (via property sale, refinancing, or other exit strategies).

Development Finance

Development finance is a short- to medium-term loan designed to fund property development projects, ranging from light refurbishments to large-scale "ground-up" construction. It is tailored for developers and investors undertaking projects with the intent to sell or refinance upon completion.

• Purpose: To finance property refurbishments, conversions, or new-build projects.
• Loan Term: Typically 6–36 months, aligned with the project timeline.
• Loan Size: From £100,000 to tens of millions, depending on the project scale.
• Security: Secured against the development site or other assets, often with stage payments released as the project progresses.
• Repayment: Interest is often rolled up into the loan and repaid at the end, typically through property sales or refinancing.

• Speed: Funds can be accessed in as little as 3–14 days, making it ideal for time-sensitive transactions like auctions or chain breaks.
• Flexibility:      Available for residential, commercial, mixed-use, or semi-commercial properties, including non-standard assets like derelict buildings.
• LTV Ratios: Loan-to-value ratios typically range from 60% to 75% (or up to 100% with additional security), based on the property’s current value or      purchase price.
• Interest Rates: Starting from 0.40% PCM (approximately 4.8% per annum), though rates can range up to 1.5% PCM depending on risk, LTV, and borrower profile.
• Exit Strategy: Lenders require a clear repayment plan, such as selling the property, refinancing to a long-term mortgage, or using other funds.
• Regulated vs. Unregulated: Regulated bridging loans apply to owner-occupied properties; unregulated loans (more common) apply to investment or      business properties.

Development Finance

• Stage Payments: Funds are released in tranches based on project milestones (e.g., land acquisition, foundation completion, or final fit-out), reducing lender risk.
• LTV Ratios: Typically 60%–70% of the Gross Development Value (GDV) or up to 90% of build costs, depending on the lender.
• Interest Rates: Start from 0.40% PCM for lower-risk projects but can range from 5% to 10% per annum, depending on the project’s complexity and borrower experience.
• Project Types:
  • Light  Refurbishment: Cosmetic upgrades, minor structural changes, or  conversions (e.g., turning a house into flats). Typically lower risk and faster timelines.
  • Heavy Refurbishment: Major structural changes, extensions, or renovations requiring planning permission or building regulations approval.
  • Ground-Up Construction: New-build projects, such as residential estates or commercial developments, requiring significant capital and longer       timelines.
• Exit Strategy: Repayment is typically achieved by selling the completed development or refinancing to a long-term mortgage (e.g., buy-to-let or      commercial mortgage).
• Monitoring: Lenders often appoint quantity surveyors or monitoring surveyors to oversee progress and ensure funds are used appropriately.

Bridging and development finance are versatile tools for various property types and investment strategies. They are particularly suited for:

• Residential Properties: Single buy-to-let properties, houses in multiple occupation (HMOs), or multi-unit freehold blocks.
• Commercial Properties: Offices, retail units, warehouses, or leisure facilities.
• Mixed-Use Properties: Properties combining residential and commercial elements      (e.g., a shop with flats above).
• Semi-Commercial Properties: Properties with partial commercial use, such as a pub with living quarters.
• Non-Standard Properties: Derelict buildings, properties without planning permission, or assets requiring significant work to become mortgageable.

Common Uses

• Bridging Finance:
  • Purchasing properties at auction with tight deadlines.
  • Breaking property chains by funding a purchase before selling an existing property.
  • Refinancing to release equity for other investments.
  • Funding urgent repairs to make a property mortgageable for long-term finance.
  • Transferring properties into Limited Companies, LLPs, or SPVs (as described in the previous query).
• Development Finance:
  • Converting commercial buildings into residential units (e.g., office-to-apartment conversions).
  • Refurbishing properties to increase rental yield or resale value.
  • Building new residential or commercial developments from the ground up.
  • Financing permitted development projects or properties requiring change-of-use permissions.

Development loans are tailored to the specific needs of a project, with funding available for various types of developments:

Light Refurbishment

• Description: Involves cosmetic upgrades or minor structural changes, such as rewiring, replumbing, new kitchens/bathrooms, or redecorating.
• Funding: Typically covers 70%–80% of the project cost, with LTV up to 70% of the property’s current value.
• Timeline: 3–12 months, depending on the scope.
• Example: Refurbishing a dated buy-to-let property to increase rental income or resale value.
• Risk Level: Low, as these projects require minimal regulatory approval and have shorter timelines.

Heavy Refurbishment

• Description: Involves significant structural changes, such as extensions, loft conversions, or major renovations requiring planning permission or      building regulations approval.
• Funding: Covers 65%–75% of project costs, with LTV up to 65%–70% of GDV.
• Timeline: 6–18 months, depending on complexity and regulatory requirements.
• Example: Converting a single house into multiple flats or extending a commercial property to add retail units.
• Risk Level: Moderate, due to higher costs and potential delays from planning or construction issues.

Ground-Up Construction

• Description: Involves building new properties from scratch, such as residential estates, apartment blocks, or commercial developments.
• Funding: Covers 60%–70% of GDV or up to 90% of build costs, released in stages (e.g., land purchase, foundation, superstructure, fit-out).
• Timeline: 12–36 months, depending on project scale and complexity.
• Example: Developing a plot of land into a small housing estate or constructing a new office building.
• Risk Level: High, due to significant capital requirements, regulatory hurdles, and potential construction delays.

Funding Structure for Development Loans

• Initial Advance: Covers land acquisition or initial project costs (e.g., 50%–60% of land value).
• Stage Payments: Released based on progress, verified by a surveyor’s report (e.g., after completing foundations or roofing).
• Contingency Funds: Lenders may hold back 5%–10% of the loan as a contingency for unexpected costs.
• Interest Roll-Up: Interest is often rolled up into the loan and repaid at the end, preserving cash flow during development.

The quoted starting rate of 0.40% PCM (approximately 4.8% per annum) reflects the competitive end of the bridging and development finance market. However, actual rates depend on several factors:

Factors Influencing Rates

• Risk Profile: Lower rates (0.40%–0.60% PCM) are offered for low-risk projects, such as light refurbishments or properties with strong rental potential.      Higher-risk projects (e.g., ground-up developments or non-standard properties) may see rates of 0.75%–1.5% PCM.
• LTV Ratio: Lower LTVs (e.g., 50%–60%) attract lower rates, while higher LTVs (e.g., 70%–75%) increase rates due to greater lender risk.
• Borrower Experience: Experienced developers or investors with a strong track record may secure lower rates.
• Property Type: Standard residential properties typically qualify for lower rates than commercial or non-standard assets.
• Loan Size: Larger loans may attract lower rates due to economies of scale, though smaller loans can also secure competitive terms from specialist      lenders.
• Exit Strategy: A clear and reliable exit strategy (e.g., confirmed sale or refinancing plan) reduces lender risk and can lower rates.

Additional Costs

• Arrangement Fees: Typically 1%–2% of the loan amount, charged upfront or added to the loan.
• Exit Fees: Some lenders charge 0.5%–2% of the loan amount upon repayment.
• Valuation Fees: Based on the property’s value, ranging from £500 to £5,000 or more for large developments.
• Legal Fees: For conveyancing and loan agreements, typically £1,000–£5,000.
• Broker Fees: If using a broker, fees may be 1%–2% of the loan amount or a flat fee.
• Monitoring Fees: For development loans, lenders may charge for surveyor inspections at each stage.

Example Rate Calculation

For a £500,000 bridging loan at 0.40% PCM over 12 months:

• Monthly Interest: £500,000 × 0.004 = £2,000
• Annual Interest: £2,000 × 12 = £24,000 (4.8% per annum)
• Total Cost (excluding fees): £524,000 (if interest is rolled up).

For higher-risk projects at 1% PCM:

• Monthly Interest: £500,000 × 0.01 = £5,000
• Annual Interest: £5,000 × 12 = £60,000 (12% per annum)
• Total Cost: £560,000 (excluding fees).

• Speed: Bridging loans can be arranged in days, ideal for auctions or urgent purchases.
• Flexibility: Suitable for a wide range of property types and project scopes.
• No Monthly Payments: Interest is often rolled up, preserving cash flow during the loan term.
• Tailored Solutions: Development finance is customized to project milestones, ensuring funds align with progress.
• Unlocks Opportunities: Enables investors to secure properties or projects that would otherwise be unattainable.

Disadvantages 

• High Costs: Interest rates and fees are higher than traditional mortgages.
• Short Term: Requires a clear exit strategy, as failure to repay can lead to property repossession.
• Risk for Developments: Construction delays, cost overruns, or planning issues can jeopardize repayment.
• Personal Guarantees: Directors or borrowers may need to provide guarantees, reducing liability protection for LTDs or LLPs.
• Complex Underwriting: Development loans require detailed project plans, costings, and professional input, increasing upfront costs.

Bridging and development finance are offered by specialist lenders, private banks, and some high-street banks. Examples include:

• Specialist Lenders: Shawbrook, LendInvest, Together, and Precise Mortgages offer competitive rates starting from 0.40% PCM for bridging and development loans.
• Private Banks: For high-net-worth clients or large projects, private banks provide bespoke solutions.
• Peer-to-Peer Platforms: Some platforms offer bridging and development finance, though rates and terms vary.

Lenders typically require:

• A  detailed business plan or project proposal (for development finance).
• Evidence  of a viable exit strategy (e.g., sale contracts, refinancing pre-approval).
• Borrower experience, especially for large or complex developments.
• Property valuations and, for developments, cost estimates from quantity surveyors.

• Work with a Broker: A specialist broker can access competitive rates and lenders suited to your project.
• Plan the Exit Strategy: Ensure a clear repayment plan, such as a property sale or refinance, to avoid default.
• Budget for Costs: Factor in interest, fees, taxes (e.g., SDLT for purchases), and contingencies for development delays.
• Seek Professional Advice: Engage quantity surveyors, architects, or tax advisors for development projects to ensure compliance and cost accuracy.
• Understand Risks: High interest rates and short terms mean missed deadlines or market downturns can lead to financial strain.

If you have a need for a Bridging & Development Facility, please contact us on 0800 061 46 49 or email ask@phillipscapital.info to discuss your options.