- 9th April 2020
- Posted by: DMM
- Category: Bridge Finance
There are a number of means to structure property development finance and in this article we look at what is a bridge loan as well as the pro’s and con’s of this type of debt. In a very competitive marketplace a property developer may need to act quickly and so we are often asked what is a bridge loan and how will it work.
A property development bridge loan is finance that is usually arranged for an agreed short period, often three to eighteen months. Bridge lenders are geared to respond rapidly with their initial indication of appetite, heads of terms, valuation and legal administration. One of the key elements to note when considering what is a bridge loan, is that the interest rates are likely to be high.
What is a bridge loan used for?
Bridge loans in real estate have been around for a long time and have been used where individuals or businesses require funding to secure land before the sale of another property. Property developers will use a bridge loan for several reasons including securing a property whilst gaining planning consent, completion of certain works ahead of gaining development finance, acquiring a property at auction or to enable more time to sell a property. When buying a property at auction, a developer will have to exchange contracts and completion will often follow within 28 days. Consequently, a fast bridge loan may be a solution and one of the key advantages to a property developer.
What is a bridge loan closed term?
Most bridge loans will usually be a closed arrangement with an agreed term at which date the capital and interest, together with any additional fees, will have to be repaid. Some lenders will agree to a serviced, open agreement, meaning that the borrower will pay interest on a monthly basis without a short-term repayment date.
What is a bridge loan typical interest rate is another common question and will, of course, vary from lender to lender. However, typical rates from around 0.5% to 1.5% per month depending upon the security being offered. Most bridge lenders will base their lending upon 1st charge security of the subject land but may also take into consideration other equity via additional 2nd charge. Bridging loans are, therefore, not a cheap means of funding and very much for short-term. An open-ended serviced bridge can be risky and any exit route should be carefully considered.
All lenders will have their own criteria for loan to value but up to 80% is not unusual on residential property (65% for commercial) and even up to 100% may be considered where other security is available.
In summary, when considering what is a bridge loan and whether it may work for you, think carefully about balance of risk vs reward. Bridge loans are quick and can secure new business but the costs may be high if the exit is delayed.