Since there is no shortage of demand for housing, profits are there for the taking by small developers prepared to buy property, renovate or refurbish it, and sell on at its higher capital value.
The cost of acquiring a property and the expense of refurbishment, however, means that a developer typically needs access to the appropriate form of finance. The answer to that need may come in the form of bridging finance.
Your objectives are likely to be clear – you have a relatively short-term borrowing requirement, sufficient for financing the cost of refurbishment. You are not looking for anything longer-term since you intend to recover the cost of refurbishment once the works are complete, or to remortgage the property at the higher capital value achieved by the refurbishment and renovation works.
Not only is your need for finance likely to be short-term, but you may also need quick access to those funds – access to possible renovation projects may require fast action to purchase at a competitively favourable price. Having secured the property, your aim is to complete the renovation work as quickly as possible so that you can “flip” it by selling on or re-financing.
It is because bridging loans are short-term – repayable over a matter of days, weeks or months, up to a typical maximum of 12 months – means that they are likely to be arranged much faster than a long-term mortgage.
Your ability to act quickly is likely to be paramount in any property transaction but may be more than usually crucial if you are buying at auction – a favourite marketplace for small developers on the lookout for suitable projects.
If you win the bid on the property, you’ll need to immediately pay 10% of the purchase price (plus any fees and insurances).
You will then typically have a maximum of just 28 days in which to complete the purchase. Failure to do so will see you lose the property and your deposit.
Clearly, this is far too short a time within which to arrange a standard mortgage. Bridging finance, however, may give you precisely the freedom you need to operate.
Bridging loans are also more flexible vehicles to finance your development proposals. If the property you are interested in acquiring and renovating is not yet inhabitable or lacks basic amenities, you are likely to be refused a standard commercial mortgage.
Bridging finance, on the other hand, is designed with just such a purpose in mind – and is likely to be available for a much broader range of properties.
The flexibility of bridging finance may also help you to acquire property and sell it on at a profit even without engaging in its physical redevelopment.
Formal planning permission for the development of a property or its extension or renovation itself adds value to land or existing property. You may use a bridging loan to ensure fast access to the necessary purchase of the land or property, using the finance only for so long as it takes to secure the required planning permission. You then repay your loan when it is sold on or you re-finance the scheme at its higher value.