Different types of short term property finance
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.
Commercial property finance
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.
Benefits of short term finance for property developers
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.
Short term mortgage calculator
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.
What are the alternatives to bridging finance?
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.