Property developers usually depend on the sale of a property to refinance a new development. However, in these uncertain times, it is not 100% certain that a sale will take place when required. In such cases, raising finance for property development can be done by taking a Bridge loan or a Development exit finance loan. To assess the right type of property development finance required, it is best to advise an expert in this field.
A few factors to take into consideration with Exit and Bridge loan facilities:
Bridge Loan
It is a short term loan to pay for property development before the sale of another is completed. Another property will be required as collateral. The amount of the loan is usually based on the combined value of both properties.
There are various types of bridging loans:
- Closed bridging: has a fixed date for repayment. This gives it more security. Interest rates are also lower.
- Open bridging: has no fixed date for repayment, but it is usually paid within 12 months. The loan interest is often deducted from the loan advance as a security measure. Because of the flexibility with repayment, the interest rates are usually higher.
- First charge bridging: When the property standing as collateral is owned outright by the borrower, it will be a first charge loan. In case of default in payment, the lender gets the first charge and will receive the repayment first or will have the right to sell the property. These interest rates are also lower.
- Second charge bridging: When the original mortgage cannot be paid due to early repayment charges or higher interest rates, second charge bridging is an option to raise funds quickly. In this case, the lender takes the second charge, under the first lender. The repayments will be made after the first charge lender is paid. Equity accrued on the property can stand as collateral. The interest rates are higher.
Interest rates
There is a spike in the interest rates since they are short-term loans.
- Monthly: The interest is paid monthly and does not add to the loan amount payable on maturity.
- Deferred: There is no monthly interest payable but the “rolled up” interest is paid with the loan amount on maturity.
- Retained: The interest amount is borrowed and then repaid at the end of the bridge term loan.
Some lenders allow a combination of these – for example, retained interest for 6 months and then monthly interest for the rest of the term.
Fees
There are usually arrangement fees and admin fees, including broker and/or exit fees.
Bridge loans are usually much quicker to obtain and are flexible with repayment terms. However, it should be kept in mind that, in case the loan cannot be repaid in time, the lender can recoup the property.
Development Exit Finance loan
This is also a short term loan to repay a more expensive property development loan once the project is completed.
There are many advantages:
- The amount will be up to 80% of the GDV – gross development value.
- It gives the developer more time to sell and frees capital to provide funds for additional projects.
- It can improve cash flow and reduce finance costs since the project is completed.
- Sometimes, funding can be arranged before the property is signed off by Building Control.
- Because the development is practically completed, the risk to the lender is less.
- It can prevent property sales under pressure at discounted rates.
- It allows refinancing the existing loan with a lower interest rate.
- Interest can be fixed (monthly) or rolled up (paid at the end of the loan period).
- The maximum time is usually set for 12 months.
The requirements are:
- Practical completion of the development.
- Full payment made to contractors.
- Planning conditions discharged.
- Warranties in place.
- Red Book valuation (an assessment by a registered valuer who provides a report on the property’s current market value).
These types of loans are very handy “to bridge the gap” when required. However, other aspects will also have to be considered – liabilities, taxation, getting the right lender, legal requirements, various fees etc. The expertise of a professional finance company dealing with property development will provide all the information required and, at the same time, arrange a bespoke deal and take care of all requirements.
