Liz Syms

Mortgage, bridging loan or development finance?




If you have a property investor looking to buy a property that needs work, there are a range of mortgages, bridging loans and development products that may fit the bill.

But how do you decide which of these is the best type of deal to recommend?

Clearly, a mortgage is likely to be the most cost-effective, long-term option, but in the main, a mortgage can only be used if the property is in a condition that means it is immediately lettable. If the investor is unable to let the property in its current condition, the lender cannot clearly assess the affordability and so work will need to be done on it to raise it to the standard that a mortgage lender will consider.

If a property is not immediately lettable — perhaps because it does not have a kitchen or bathroom or perhaps the EPC rating is F or G — then bridging could be the next alternative to consider. A bridging loan will enable the client to have short-term money to raise the property to the standard that it needs to be to rent it out and get a longer-term mortgage on it.

However, for a bridging lender to consider the property, the property generally needs to be ‘water-tight’. For example, if someone plans to build a property from scratch, then a development loan is required instead. A development loan is really a short-term loan, like a bridge, but can be geared for ground-up developments.

More and more lenders are entering the development loan market and many offerings are better priced than standard bridging.

Standard bridging loans are more straightforward, but if a broker decides that a development loan is likely to be the best solution, it is useful for the broker to understand a little more about how this loan type works.

Brokers should gather more information about the current asset, what the plans for the building are, whether there is planning permission, how long the works will take and how much they will cost. They should also understand what the final asset will look like and its predicted final value.

Funding is based on a maximum LTV against the initial acquisition cost, cost of works and overall maximum LTV against the end value of the development, ie the gross development value (GDV). The loan is then released in stages as the project develops.

With more lenders entering this market and strong demand for new homes, it is a great time for brokers to get involved or partner with a specialist distributor so they can take advantage of this rewarding opportunity.

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