Bridging loans or interim finance is a great way to secure emergency funding for your property development needs to ensure unhindered completion. These are becoming increasingly popular in the real estate and property development industry, where often the developer might experience a sudden need for more funds. It’s then that one’s financial urgency can be sufficed by bridging loan for property development, as a temporary loan for short-term liquidity needs.
What is a Bridging Loan?
A bridging loan can be defined as short-term or temporary funding usually acquired for 6 to 12 months. It is used by a property developer or builder to bridge the funding gap until permanent financing is acquired. It provides immediate cash flow to meet urgent financial requirements until the project is completed.
How Does Bridging Loans Work?
Bridging loans are quite a popular form of property financing and is acquired by both individuals and corporations. For example, it can help a homeowner to buy a new property while the old property is put on the market for sale. The homeowner can use the loan for a down payment of the new house, and once the old property is sold they can use the cash received to pay off the debt.
What are the Different Kinds of Bridging Loans?
Bridging loans usually have a higher interest rate and categorized under open and closed:
Open Bridging Loan: An open bridging loan is when payment details such as the source and timing of the payment are somewhat unclear.
Closed Bridging Loan: A closed bridging loan is when there is a specific exit plan with clear payment timings. There is certainty in this kind of loan and hence is preferred by both borrowers and the lenders.
When Do You Need a Bridging Loan for Property Development?
There are various reasons why a developer might apply for a bridging loan. Given under are a few instances:
- Property Sale Chain: Sometimes the development of a property might get funded by the sale proceedings of another. Until the later materializes, one can acquire short term liquidity from lenders, to bridge the equity gap.
- Refurbishment Financing: If a property is deemed unfit for a mortgage, bridging loans can be secured for renovation purposes by landowners and developers to raise the value of the property and then put it in the market.
- Cash flow Emergency: It is common for an ongoing property development project to come up with urgent cash needs, due to exceeding expenses. Such immediacy can be sufficed by bridging loans or interim financing.
- Property Auction: The ones making the winning bid at a property auction need to make a 10% down payment on spot to acquire claim of the property. The rest of the money needs to be settled in a month or less than that. Developers often use interim financing to buy property at auctions, as the arrangement can be made fast while ensuring completion of purchase within the given settlement time.
Therefore to summarize all the points explained above, bridging loan for property development is short-term and flexible, and often a crucial financial push to take a development project one phase to the next. The best part about this kind of loan is that it is easily and quickly accessible, provided you have the right bridging loan brokers by your side.