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If you’re looking to purchase a property at auction – perhaps to refurbish, or to acquire the land to build upon – then you may need finance to complete the transaction.
80% NET
No ERC
2.99%
Daily
25 Years
£250k
£25M
OMV
With the boom in UK property activity recently, it’s less than surprising that more and more buyers are needing short-term property loans in order to complete sales, renovations, and developments whilst the market is so hot.
In response to the market seeing increases of over 8% in residential property in 2020 alone, more and more people are looking for great deals in UK property. Residential properties that require more work than the normal market house are becoming more attractive for those with the skills to develop them and turn a good profit.
Similarly, with the heat of the market seemingly white hot across the country, many more people are now using short-term finance to break property chains and their reliance on other buyers so that they can speed up the purchase of a dream home or ideal property.
That has, in turn, meant that the loan and finance market has responded in kind and diversified their product offerings, meaning that there’s much more choice now for those looking to utilise this short-term lending. Not just high street lenders, but investment banks, foreign investors and pension funds are looking at ways to increase their exposure to UK property, and these are lenders that we’re able to get access to for you.
To give you a better idea of what’s on offer and what you might qualify for, we’ve put together a short guide for you.
Hank Zarihs Associates streamlines your financing journey with tailored solutions, fast approvals, and expert guidance, connecting you to trusted lenders for project success
As we’ve mentioned, because of the demand for this type of short-term finance, the choice has expanded markedly over the past few years, but we’ve put together a short guide for you here to break down some of the most popular choices for our clients.
One of the most popular forms of shorter term property finance is bridging finance. In essence, a bridging loan is a specifically designed loan for the short term.
The interest tends to be higher because you’re borrowing it for a shorter period of time, meaning lenders need to make up the shortfall, but they’re extremely flexible in terms of the length of time, repayment terms, and what they’re used for. In their basic format they can be used for anything, however, we tend to find that their main use is either for property development, or to break the chain in a property purchase, to give two examples.
With bridging finance or a loan, it’s important to be able to show the lender how you intend to repay the loan, this called an exit plan, and gives the lenders confidence that you know how you’ll repay your loan, and in the time you say you will.
If you’re looking to purchase a property at auction, then it’s likely you’re going to need to organise some shorter term finance in order to fund the purchase, as auction properties need to be completed within 28 days of the auction. That can sometimes be a stumbling block when our clients are looking to arrange, for example, a mortgage, as this often takes longer.
Furthermore, auction property is usually on the market for a number of reasons, including repossessions, inheritance, and being in a state of disrepair and requiring renovation.
If your property requires a level of renovation work doing then it’s unlikely that you’ll qualify for a mortgage until those works are completed, as it would be considered too risky to agree longer term finance. Auction finance can also cover these costs for you too.
Auction property also often requires a slightly higher degree of legal paperwork before a sale can be completed, and this can mean higher legal fees than usual, and this type of finance can also help you cover these costs too, if you require it.
Development finance tends to fall into two categories, either building from scratch on land that you’ve already acquired or developing an existing property into something else.
If you’re building from scratch on land that you’ve acquired, it’s important that you get planning permission approved before looking into finance or loans, as they’ll be dependent on this. After that, lenders much prefer experienced developers over those new to the business, so it’s also important to be able to prove at least some success to be considered for this type of finance.
If you’re looking for development finance, you can either get a straight loan, usually up to about 70% of the Gross Development Value (GDV) and pay the interest and principle sum upon completion, or you can apply for a joint venture loan, where an investor provides 100% of the capital but asks for a share of the profits once the development has been completed.
If you’re looking to convert an existing property, for example, into flats, then again most lenders prefer more experienced applicants, and you’ll be asked to provide a business plan and show that you’re able to work to the time scale you’re suggesting. At that point most lenders will require about a 30% deposit and the rates will vary.
Finance could be considered for commercial use if you’re buying a commercial property, if you’re converting a commercial property, or if you’re taking out the finance as a business or using a Special Purpose Vehicle (SPV) for tax efficiency purposes.
If you’re converting commercial property, this could mean that you’re changing the building from commercial to residential, or vice versa, but similar characteristics apply to these types of loans as well as bridging loans and finance.
If you’re applying as a business or SPV, then it also means the finance or loans are unregulated, as they’re not covered by the FCA as you’re not a consumer, you’re a business.
Again, these loans operate under very similar terms to bridging finance and development finance, however, the distinction is important because, generally speaking, there are different risks involved. For example, a commercial property can command more than a residential property in rental yields, however, the market for tenants can be smaller, and it’s more difficult to chase arrears.
Here are some of the main benefits to consider for shorter term finance:
The terms of this type of finance are flexible in that you can usually get loans from 1 month up to 36 months, the rates of interest vary, and you can often pay them off early if you need to. In terms of interest, you have the option to either pay the interest up front, monthly, or rolled up at the end as part of your repayment.
Unlike longer term finance, the time it takes to find, arrange, approve, and receive funds is much quicker, because these loans are designed to be quick and easy. This often means that when things need to be done quickly, we find our clients will approach us to deal with finance regularly, for the ease and convenience.
Our panel of lenders understand the property market and what it takes to succeed in the industry, so rather than when you approach a high street bank, you can be sure that their finance products and loans have been specifically designed and tailored to suit those in the property industry.
To help give you a better idea of what a shorter term loan or finance may cost and what you may qualify for, we’ve included a short term mortgage calculator that allows you to edit the loan amount, the amount of your deposit, the interest rate, and other important metrics that you can play around with.
It’s intended to be illustrative, so if you want more specific advice, we’d recommend speaking to a broker that can get some more detail from you and give you a more accurate quote.
In terms of the alternatives, there are longer term options such as more traditional mortgages, however, they present their own issues if you’re not in the position to go through the application process straight away, and if you need to move quickly on it.
Secondly, you could use your own money or savings if you have it, or simply try and use a business credit card or overdraft, for example, but these can be very costly and tend to eat up your profits pretty quickly.
Shorter term finance is often ideal in the property world because it moves fast and throws up the unexpected. In these circumstances we often find that our clients need quick access to capital in order to provide a shorter term solution to their issues whilst they arrange something for the longer term.
These loans are flexible, quick and specialised meaning they’re attractive to our clients. It’s why they’re such a popular product.
Finally, these are products that we have a huge number of lenders willing to provide you finance on. Going through a broker for shorter term finance allows you to shop this entire market, find you the best rates and help you find exclusive deals.
Speak to one of our brokers today about shorter term finance.
You may have heard about bridging loans in the context of property investment or moving house, but what exactly are they? Basically, bridging finance is a type of short-term loan that allows a buyer to purchase a property before their existing home or investment property is sold. As the name suggests, it ‘bridges’ the funding gap in the lag between purchase and sale – offering rapid access to the necessary purchase funds for a brief period of time.
Borrowers can access from £5,000 to £250 million, depending on applicant status, the value of the property and other lender criteria. Higher lending amounts are typically reserved for borrowers who can put up several properties as security. Quotes are provided on a Loan to Value (LTV) of 65%-80% in most situations.
The bridging finance market has grown rapidly, with a number of small and focused lenders now on the market, catering for specialist property finance needs. The market has changed because large high-street lenders have become less willing (and sometimes less able) to lend ever since the financial crisis of 2008.
As to whether a bridging loan for property development, auction purchase or private home buying is a good idea, it depends on a variety of factors. Bridging loan requirements vary by lender, but each will have certain common features that need to be considered.
The most notable feature of this type of finance is that the interest rate is likely to be high. At the same time, there are typically high administration fees applied to the loan. Because of this, it is essential to proceed very carefully and with a full view of the facts. Borrowers have been burned by this type of loan in the past, in instances where transactions have fallen through, or where lenders have turned out to be unscrupulous and untrustworthy.
Benefits of instant bridging loans
1. Rapid access to money
2. Ability to borrow large sums – often up to £250 million depending on applicant status
3. Options for flexible borrowing.
Possible downsides of bridging loans:
1. Failure to understand the unique features of these loans can result in financial risk
2. Bridging finance is secured against your property; meaning it can be sold if you can’t meet the repayment terms
3. A costly option with fees and higher interest
Bridging finance interest rates will vary by lender. However, interest costs of 1.5% a month are not unusual, which can equate to an annual percentage rate of 18%.
Bridging loans may have fixed or variable interest rate features. Fixed interest rates are ideal for customers who want stability, as they offer the same amount of interest for the duration of the term. The rate is pre-agreed, but there may be a premium for this security.
The other choice is to have a variable rate bridging loan which can change with the base rate. However, you can save money if the base rate decreases. Borrowers who are less concerned about security sometimes prefer the variable rate option if they believe that the financial markets will travel in their favour. Knowledge and market insight is required here, along with a thorough understanding of personal risk tolerance. If interest rates appear to be rising, most customers will choose the fixed interest rate to lock it in and avoid further increases in the event of a base rate rise.
Bridging loan periods tend to be for several months and there are usually different options for paying the interest portion.
Monthly repayments
The customer repays the interest every month as a separate payment, rather than adding it to the outstanding balance
Rolled-up bridging finance deals
The compound interest is calculated monthly but added to the outstanding loan balance and paid together when repayment is due.
Retained interest
The monthly interest payment due is covered up to a predefined date so that the full sum is only repaid when monies are due.
As well as interest payments, there will be an arrangement fee for the set-up of the bridging loan, which is usually around 1-2%. A repayment fee for exit paperwork may also apply, along with valuation fees for the cost of the surveyor.
Remember, this type of finance is designed to be short-term. As soon as it extends beyond the agreed interim or bridging period, penalties can rapidly stack up. Typically, bridging finance is available for 1 – 18 months.
Yes, there are two broad types: closed bridging finance and open bridging finance.
With closed bridging finance you will tell the lender how you will repay the loan – with what funds and when. These loans usually complete within a few months and the clear exit plan is required as a lending condition.
Open bridge finance won’t usually need this type of exit plan, and it is typically the loan of choice when funds are needed urgently to complete a property transaction. No detailed plan is needed to explain how the debt will be settled, and the finance tends to be offered for up to a year. Of course, it’s important to note that interest will keep being applied throughout this period.
There are also first charge bridging loans and second charge bridging loans.
If you have a loan against a property which is already mortgaged, you’d take out a second charge loan. An example of this would be if you were planning to finance a property extension to improve the property. The categorisation tells the lenders who will have legal priority for repayment if the loan was unable to be paid off at the term-end.
First charge loans apply if the new loan is the first secured on the property.
Bridging loan requirements will depend on the lender. Often, lenders will require that:
Customers must also take out their property mortgage with them too, providing the bridge finance as an interim measure before the standard mortgage comes into play.
Property is put forward as security against the loan. Some lenders expect applicants to have more than one property in order to be eligible for their bridging finance products, but this will depend on the lender and the size of the loan.
Applicants show proof of income – although, interestingly, as loan interest isn’t repaid monthly, some lenders do not request this.
The applicant shows evidence of their property investment track record if they are planning to develop their purchased property.
The applicant can show a business plan if they are using the bridging loan for commercial purposes.
Development loans are another type of short-term property development loan. They are repaid in stages and calculated on the gross value of the development. Personal loans are another option, as are remortgages when timescales are more flexible and a long-term loan is desirable.
Use a bridge loan calculator
Ask for your lender to provide a tailored bridge finance example or illustration around your particular borrowing needs.
Think carefully about the type of bridging loan that you need – whether open bridge finance or closed bridge finance.
Know whether the loan is a first or second charge type.
Clarify whether the interest rate is fixed or variable.
Review products from several lenders.
Be clear on your security.
Read the small print!
Bridging loans are offered by banks, building societies, specialist lenders and brokers. They aren’t widely advertised and usually require a direct application by the customer to find out the product features and offers.
Once you have made an application, a decision will usually be made within 24 hours. The funds then will take around two weeks to be issued, including time for checks to be carried out, the valuation and the actual transfer.
Hank Zarihs are highly experienced and specialist financial intermediaries operating in the property development market. We work with a tried and tested panel of over 60 trusted lenders and can provide excellent bridging finance with attractive features. Contact us to find out more.
Hank Zarihs Associates streamlines your financing journey with tailored solutions, fast approvals, and expert guidance, connecting you to trusted lenders for project success
A Privately Owned Independent Boutique Financier Whose Main Area of Focus is the UK Real Estate Market. Specialists in Raising Debt and Equity for Professional Sophisticated Investors and Developers.
Our core focus is offering fast solutions, financial products that deliver results, and the highest of service levels. If you would like to find out more please contact us to discuss your funding requirements.
Address: 2nd floor North Park House, The Precinct, High Road, Broxbourne, EN10 7HY, United Kingdom
Mobile: +44 (0) 20 3889 4403
Email: contact@hankzarihs.com
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