Guides Bridging Loans for Property Developers: How it Works

I’m often asked whether I use bridging companies and bridging loans, and the truth is that for smaller developments, we simply have no choice. Like many others in the industry, I frequently rely on these companies.

The Changing Landscape of Property Finance

Before 2009, we mainly dealt with the big clearing banks like Barclays and NatWest. However, following the financial crash, their appetite for property lending plummeted. Even now, while some banks claim to be open for business, they often take months to respond, only to decline your application or ask for more information. Surprisingly, their interest rates are not significantly lower than those offered by bridging companies.

This financing gap led to the rise of bridging companies, which have effectively filled the void. They’re able to move very quickly, and are normally able to give you a decision in principle within 24 hours.

Understanding the Fine Print

Of course, as with anything, the devil is in the detail. Offers are subject to valuations, credit checks, and other assessments. In my opinion, an offer doesn’t mean much until the money is actually drawn down.

Most bridging companies charge around 1% per month and typically require an upfront fee of 1-2% of the loan amount. Additionally, there are solicitor fees to consider. You’ll find that many bridging companies use expensive law firms because they borrow money from other institutions, which often insist on using their own solicitors.

Loan-to-Value and Development Costs

Typically, bridging companies offer loans at 65-75% loan-to-value (LTV), covering both the purchase price and development costs if the project is deemed viable. This has opened up development opportunities for those who previously couldn’t afford the required 50% equity contribution before 2009. Bridging loans have genuinely been a game-changer within the industry.

Key Considerations When Using Bridging Loans

Here are some important tips to keep in mind:

Interest Deduction

The first year’s interest is often deducted upfront, meaning the actual amount you receive will be lower. For example, a 65% LTV loan may result in a net of around 55%.

Plan for Delays

If you anticipate needing the loan for 12 months, consider borrowing for 15-18 months instead. Bridging companies profit significantly when borrowers exceed their loan terms and are charged extra interest. So they certainly aren’t phased if you can’t pay them back on time; they only worry if you can’t ever pay them!

Maintain Communication

As with any lender, if you encounter challenges, inform your bridging company immediately. Most bridgers prefer to collaborate and find solutions, as their main goal is to get their money back.

Avoid Exit Fees

Some companies impose costly exit fees based on the final loan amount. Try to negotiate this out of your agreement.

Negotiate Where Possible

Bridging companies are under constant pressure to lend. Depending on their recent activity, you may be able to negotiate lower interest rates or reduced fees.

Looking for Property & Investment Advice?

I work with several bridging companies, and if you’re unsure which one suits your project best, I’m happy to help. Feel free to reach out at info@johnhowardproperty.com, and I’ll do my best to point you in the right direction.