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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.
75% GDV
36 Months
0.50%
Rolled
Up to 90%
£1M
£50M
OMV
Construction loans are a specifically designed type of loan and finance that allows property developers and investors to get a short term loan to cover the cost of building on land and to get their project off the ground and up and running.
Many property developers struggle to get finance or a loan from traditional lenders for this type of project because the risk tends to be higher, but with a higher reward. They tend to be more targeted towards those with experience of the sector and with successful projects that they can demonstrate in order to give loan companies confidence in their abilities.
Construction loans are lent on the cost of the build rather than the estimated value of the properties once completed, which is somewhat different to other types of loan where the loan value is calculated based off the current or estimated value of the property. The lenders offering construction loans will often agree quite strict terms around your build schedule and completion dates.
They’ll often check throughout the build to ensure that the construction loans they’ve agreed to are on schedule to be completed and, subsequently, the loan is also on schedule to be repaid once the development has been completed.
Buying and building on land has never been easy, even for the most experienced amongst us. Thanks, in part, to the larger house building companies buying up hordes of land and then sitting on it hoping that it appreciates in value there has been something of a shortage of new housing coming to the market for quite a long time.
Unfortunately for the government, this doesn’t help them particularly when there’s something of a housing deficit emerging especially when they’re trying to attract younger voters who want to be able to buy their own house despite a distinct lack of supply.
Thankfully, the government then took it upon themselves to legislate to make it easier for smaller construction companies to be able to purchase land and develop it, building more houses for the UK in the process.
The resulting months and years following the pandemic have meant that people’s priorities when it comes to housing and their living spaces have changed dramatically. Whereas most would have earlier prioritised location and proximity to their work, now things have taken something of a U-turn, with most now preferring space, gardens and recreation space above all else.
Construction, subsequently, has taken on a new importance in the minds of the people in charge, but also investors, finance companies and loan providers. Property developers are now incentivised like never before to get building on the land available to them with profits now more than at almost any other time.
It’s meant that demand for construction loans has also risen dramatically along with this change in the environment, with many property investors and development experts now looking to gain much more exposure to this type of project. This has meant that, luckily, construction loans have become much more accessible and specialised in order to respond to this increase in demand.
In terms of construction loans, rates will vary depending on which construction loan provider you approach, and it will often depend on your circumstances and how well you meet the construction loan criteria too. As an example, if you can demonstrate good property development experience then you may be able to get a better rate of interest than if you hadn’t much construction experience in the past, and similarly the size of the deposit or down payment that you’re able to provide will show the finance provider that you’re able to fund your own project to an extent and believe in yourself. Broadly speaking, a construction loan is interest only, and the interest can either be paid monthly or as a lump sum, but these are terms you can agree with your lender, or things that you can discuss with a broker or one of our advisors.
For a construction loan, the actual process of obtaining funding for your property development is fairly quick and can be completed within about 72 hours once you’ve been accepted, however, the application process can vary depending on where abouts you are on your development journey, or what your property plans look like. Our team of brokers are experienced and help our clients on a regular basis with planning this type of property development, and can give you a good idea of what level of detail you’re going to need to provide to qualify for a construction loan, as the key is in the detail quite often with this type of construction loan.
With a construction loan you don’t always have to provide security but it’s certainly preferred by the majority of construction loan providers. Being able to fund some of your own property development displays that you’re serious about the project and aren’t just taking a chance with somebody else’s money. It shows a construction loan provider that you’re willing to risk some of your own money in order to complete your project along with the funding of the provider.
How much security you’ll need to provide will depend on you, your situation and the construction loan provider that you choose to go with.
Ready to apply for development finance? We work with a tried and trusted panel of development lenders who are actively lending. The deals that we can recommend to our clients are updated daily, so you have complete peace of mind that you are receiving details of the best possible finance products on the market in real-time.
Hank Zarihs Associates streamlines your financing journey with tailored solutions, fast approvals, and expert guidance, connecting you to trusted lenders for project success
To help you get a better idea of what a construction loan entails, we’ve put together our handy and simple to use construction loan calculator so that you can get a better idea of what the costs may be and help you to plan your property development better.
Simply follow the straight forward steps and you’ll get a good illustration of what a construction loan would cost for your property development project.
With most construction finance the answer is yes. Most construction finance providers will expect you to put down a down payment of between 20% and 25% or enough to cover the cost of construction and the mortgage on the project.
This is because with this type of construction finance and the type of project they give funding to are, generally, much higher risk than a standard bank loan for example.
If you’ve got good experience in this field and you’re able to demonstrate a good track record in construction and development of this type of project then it increases your chances of approval as your risk profile lowers in that you’ve got demonstrable success in achieving this type of property development.
Construction loans work slightly different to a traditional loan in that the full amount isn’t paid up front or at the point of agreement.
Once construction loans are agreed they are released in what’s known as ‘draws’ which will be against an agreed schedule. In most construction loans the first draw will be your own funds, which works as a de facto deposit against your loan.
When you provide your construction plan to the loan provider they will want to see your project schedule in order to see when each stage will be completed, and they will then subsequently make an agreement of when to release the draws until the project is then completed and the loan can be repaid.
Getting this type of loan, or construction loan, isn’t necessarily difficult but lenders do have quite strict criteria they’d like you to meet as this is quite a specialist type of loan.
With a construction loan the idea is to be able to demonstrate that you’ve planned everything in reliable detail and that you’ve got a good chance of completing the project on time and effectively repaying your loan on time. Due to the nature of this type of construction and project, it presents a high risk to the lender and, as such, means that they need to be sure about you before agreeing to your loan.
What we can offer, however, is some market leading advice with our specialist loan advisors who can tell you in much greater detail what you’ll need in order to qualify for this type of loan as a property development investor. Construction isn’t easy, but even if you have little experience there are other ways to provide lenders with confidence that you’re able to complete your project on time and repay your loan too.
Our advisors and brokers can help you to do that by helping you with things such as business plans and helping you to write a build schedule and helping you to understand how you’ll need to break down the construction and property development.
If you’re looking for commercial construction loans, these are also available if you’re planning a commercial construction and the development is right for the land that you’re planning on constructing the property on.
Just like a residential construction loan provider, the terms and conditions are broadly the same and, similarly, the rates aren’t hugely different either. A provider of commercial construction loans will be looking at your experience, how much security you’re able to provide and the team you’ve got around you, for example, in exactly the same way a residential construction loan provider would.
They’ll also want similarly detailed plans from you about a commercial construction, as these too are risky. They’ll want a full build plan and schedule for your commercial construction, and they’ll be seeking to release the funding in stages too, rather than releasing the full amount.
In many situations commercial construction can actually be less stressful, so it’s worth discussing the funding with one of our broker team who can get you across what you might need to provide in order to qualify for funding.
Our team have been built over years based on their experience, expertise, customer service and ability. We’re incredibly selective with our recruitment process and only have the best working in our team of experts and advisors.
We want our clients to feel like they’re speaking to the best in the business when they reach out to us so that they can have the confidence that they’re getting the very best advice, and that they’re getting a selection of the best products on the market too.
We’ve spent years in the business and we’ve funded millions over that time for our clients, from smaller projects requiring just a few thousand pounds, to huge construction projects requiring millions. Whether you’re a smaller or a larger developer it doesn’t matter to us, we’re here to talk you through the process and how to get the best.
We’ve spent a long time building our relationships with our panel of lenders and that means that they’ve got confidence in us to only come to them with applications that we know have a great chance of being accepted. When it comes to it our lenders know that we’ll have spent the time with our clients to ensure they’re ready.
We help clients from start to finish with their applications and always ensure they’ve got all the information they need. Whether you need help with a business plan, a build schedule or an exit strategy we know how to help you out and we know how to get things done.
We also appreciate that time is of the essence for our clients, and that they need access to funds quickly, which is why we’ll always ensure you’re getting things done as quickly as possible so that you’re able to get on with what you’re good at, and that’s developing properties. So why not get in touch today?
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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