How do property developers use bridging finance?
Many property developers use bridging finance as a means to buy property at auctions, or new developments as well as to undertake improvements, conversions and refurbishment. This injection of finance allows developers to get projects started in the absence immediate funds. Some property developers will also use bridging loans to break mortgage chains, to purchase buy-to-let properties or raise working capital.
Here is a good example of when and how a property developer may call on a bridging loan:
A developer has viewed two properties, both require refurbishment and both present an attractive and lucrative resale opportunity. The properties are known amongst the property developer community and there has been interest from a number of parties, speed is therefore of an essence or another developer will secure these properties. A bridging loan can be put in place where a normal mortgage application would have resulted in the property going to another developer who had the funds immediately available. Bridging finance can be made available at short notice especially if both the property and developer present a credible investment, this allows the developer to buy the properties and begin his renovations.
This is a classic example of when a bridging loan can secure a property for the developer; it allows the developer to secure the property without the need to sell any of their existing property or assets. This is particularly useful when property is bought for the sole purpose of immediately selling it on again for a profit. By using bridging finance the only additional cost for the developer would be the interest paid on the short-term bridging loan.
Bridging loans are also great for those developers who want to reduce or reorganise their costs and equity or are looking to execute draw downs across an investment portfolio to release some cash.