The London property market moves quickly and property developers need to raise funds fast to secure the best deals. That’s why bridging finance is so common in the capital, providing a swift, short-term loan for the purchase of property or land. If you’re new to bridging finance, it can be confusing initially. Our bridging loan experts provide advice to many London developers and one of the most common questions is “how can you use development bridging finance?”.
In London, bridging loans are commonly used for commercial property development, such as office space and flats. Bridging finance can be used for the purchase of land, construction projects, refurbishment and buy-to-let property.
See our bridging loans in London page for more information and advice.
If you are an aspiring or experienced property developer in London, read on to find out how property bridging finance can be used, how it works and how much it costs. For more detailed advice and a quote, contact Bridging Options to speak to a specialist bridging loan broker.
Is it worth investing in property development in London?
Despite the difficulties of the past few years and the financial uncertainty following the 2022 autumn budget, property development in London is still widely considered a sound investment.
The capital’s housing shortage is driving growing demand for rental property, with demand up by 20% from 2021 to 2022, while the number of new properties has decreased year on year (Source: www.rightmove.co.uk).
In the wake of the current financial crisis, mortgage interest rates are on the rise and as a result, London property prices are expected to drop in 2023. So the coming months could present a significant opportunity for residential property developers to snap up deals for refurbishment or buy-to-let, to meet the ever-growing demand.
Where there is an opportunity there is competition, so if you find a good property investment deal, you will need to act quickly to secure it. But don’t be too hasty – finding the right bridging finance to maximise your return on investment is vital.
It pays to consult a professional bridging finance specialist who knows the market and can pinpoint the best deals to suit your project and circumstances, fast. To make an appointment with an experienced property development finance expert to discuss your next project, please contact Bridging Options.
What type of development projects can bridging loans be used for in London?
Due to the boom in the UK property market, demand for bridging loans is thought to have shot up in 2022 by over 20%. While London property prices have seen more steady growth, there has been a huge surge in rental demand post-pandemic, driving the need for more residential housing and commercial office space.
There is clearly a lot of opportunity for investing in commercial properties in the capital. Here are just some of the projects that bridging finance can be used for.
Construction projects
A construction bridge loan provides funds at the beginning or part-way through a construction project (such as a block of flats). Funds are typically issued in instalments on the completion of different stages of the build, enabling developers to keep the momentum going. A bridging loan of this type covers the cost of construction only.
Buy-to-let
Buy-to-let is an attractive opportunity for first-time property investors, but requires quick action to secure the most lucrative deals. A buy-to-let bridging loan can be secured far quicker than a mortgage, so often presents the best option.
Auction finance
For London developers, snapping up property for refurbishment at auction or ‘distressed sales’ often delivers the most lucrative return on investment. However, purchase at auction usually requires a hefty 10% deposit on the day, so a bridging loan can offer the ideal solution.
Mixed-use properties
Buildings repurposed for multiple uses are becoming more and more commonplace in London, driven by the demand for modern, flexible living. This type of investment is attractive as investors can depend on multiple sources of income and avoid putting all their eggs in one basket.
Refinancing/re-bridging loan
Development projects don’t always go to plan and delays are sometimes unavoidable. This has certainly been the case recently, following the effects of Brexit and the pandemic on labour and building supplies. Fortunately, some lenders will consider refinancing an existing bridging loan if your term is coming to an end before a project’s completion.
Office space
As you would expect of one of the world’s most important financial centres, the demand for office space in London is high, despite the growing trend of home working. The market is buoyant, with an estimated 9m sq ft of office space due to be completed in 2023. This is thought to be driven, in part, by a record number of new SMEs.
Are bridging loans just for property development?
Bridging finance is commonly used for investment property in London, but bridge loans can be taken for other purposes. Some lenders may consider loans for things like paying tax bills, divorce settlements and business enterprises, for example.
Private home buyers can also access bridging finance, typically when a mortgage is not an option or to fund the purchase of a new property before their existing house sale goes through.
How does London bridging finance work?
Bridging loans for property development are taken out to bridge the gap between purchasing and selling assets; ideal for funding construction and refurbishment projects. It is short-term finance with terms of no longer than 12-months.
Funds can be accessed quickly, but lenders usually require significant collateral to be put up and interest rates are a lot higher than mortgages because of the perceived risk.
If you are seeking bridging finance for property development in London, then you will most likely have to consult a specialist lender. High-street banks do offer bridging loans, but they are managed by subsidiaries and are typically hard to access.
In either case, it is best to consult an independent development finance broker to ensure you are presented with a full range of deals.
Who is eligible for a bridging loan in London?
When it comes to development finance, specialist lenders are typically more flexible in their lending criteria than mortgage lenders.
As substantial collateral (cash or existing property) is required to secure bridging finance, bridging lenders tend to place less importance on credit history and proof of income. A good track record always goes a long way, of course.
All bridging loan lenders have their own criteria, of course, but there are standard requirements. For example, the borrower must:
- have collateral such as property to secure the loan against
- be over 18 years old
- have a registered address in the UK
- be employed, self-employed or retired
- use the bridging loan for commercial purposes
- be able to demonstrate an exit strategy, ie. their plan for repaying the loan
Do I need planning permission to take out a bridging loan in London?
A lot of traditional lenders will require proof of planning permission before taking out a bridging loan. However, many private banks and lenders are willing to release funds before planning permission is granted.
To be sure of saving time by approaching the right lenders, it’s wise to work with a professional bridging loan expert.
How much does a bridging loan cost in London?
When taking out a bridging loan, be sure to include the associated costs in your projections. Here are some of the costs you can expect:
Arrangement fees
What? – This is sometimes called a product fee and is the cost charged by the lender for arranging the loan.
When? – Paid up front when the loan is taken out.
How much? – Fees are typically around 1-2% of the loan amount but can be as high as 3%.
Interest
What? – The interest paid on the loan amount, presented as a percentage.
When? – You will be required to pay interest on a monthly basis unless you choose an interest roll-up approach and pay it in one lump sum when the loan is repaid.
How much? – Interest rates on bridging loans are usually a lot higher than for mortgages, due to the higher risk involved for the lender. Rates can vary between 0.4% to 2% (as of November 2022).
Exit fees
What? – The charge the lender applies for early repayment of the bridging loan. Not all bridging finance lenders charge exit fees, however.
When? – As and when the loan is repaid, if it is before the pre-agreed term.
How much? – Around 1-2% of the loan value.
Other costs associated with bridging finance include admin, legal and valuation fees.
What is the average loan-to-value (LTV) for bridging finance in London?
0% bridging loans are available in London but are scarce. On average, expect a 75% LTV rate. This can vary, of course, depending on the level of collateral put up to secure the loan.
What are the terms for London bridging loans?
There are two options when it comes to negotiating a bridging loan term.
Closed bridging loans have an agreed repayment date, usually within 12 months. An open bridging loan is just that – there is no set repayment date, although the lender will still require evidence of your exit strategy.
Secure finance for your next development project with Bridging Options
If you are seeking short-term finance for developing property in London, then speak to a bridge loan specialist at Bridging Options. We deliver financial solutions and expert advice to property developers throughout London.
We have access to the best deals on the market and can secure loans of £25k upwards in as little as five days. Our carefully selected team of experts will also take on the application process, saving you precious time.
To ask a question or organise a call back, please fill in our contact form.
Learn more about the different ways you can use bridging loans here:
