How does Property Development Finance work?Published on 29th May 2019 2019-05-29T11:00:00+00:00
Regardless of whether you own commercial real estate, a single business premises or a string of HMOs, managing and maintaining property is a tricky act to pull off. As well as identifying areas where improvements can be made, you also need to ensure that you have access to sufficient amounts of capital. Although it can be tempting to simply dip into your savings, you can ease the pressure on your finances by spreading out any expense through applying for Property Development Finance. So, how exactly does Property Development Finance work?
What Property Development Finance solutions can I apply for?
What makes Property Development Finance such an invaluable tool for any property owner seeking to invest in their portfolio is that it enables you to spread out the expense, easing the pressure on your existing finances. This is made possible because Property Development Finance grants you access to two different ways of raising capital: Commercial Mortgages and Bridging Loans. Just remember to make sure that you fully understand how each of these products work before placing an application.
What can Property Development Finance be used for?
Although Property Development Finance is designed exclusively for property-related issues, it can be used for a variety of purposes. If you’re a seeking to invest in your portfolio, you could use this package to help refurbish customer-facing areas, add extensions, make a property more attractive to tenants, carry out urgent maintenance or even making changes to keep on top of industry regulations.
How much can I borrow using Property Development Finance?
Another great reason for applying for Property Development Finance is that there’s no maximum credit limit determining how much capital you could borrow, other than what the lender is willing, or able, to lend. The reason for this is that, with either product, funding is determined according to the current worth of the property in question. So whilst both Commercial Mortgages and Bridging Loans could provide a lump sum up to 80% of the property’s value, you also need to deduct the amount of equity you’re placing in the agreement if you decide to use a Commercial Mortgage. Subject to negotiation, this usually starts at 20%, but you can offer up to 40% in order to gain a more favourable deal and reduce the amount of capital you need to borrow.
How is Property Development Finance repaid?
If you’re set on applying for Property Development Finance, this is where you really need to understand the differences between Commercial Mortgages and Bridging Loans. Commercial Mortgages are repaid over a long-term period (up to 20 years) using a Fixed Monthly Repayment scheme. However, whilst the Principal (capital borrowed) remains the same, the amount of interest charged each month can vary depending on whether you’ve chosen a fixed rate or variable rate mortgage.
Bridging Loans, however, use an entirely different repayment process over a short-term period (up to 12 months) where the Principal and the Interest are treated as two separate parts of the agreement. So to begin with, you decide how you’re going to handle the Principal, which will also affect when the agreement matures. To that end, you can either apply for an:
Open Bridge: With an Open Bridge you aren’t required to fully repay the loan by a specific date. However, you are expected to completely repay the product within the prescribed term or period.
Closed Bridge: If you choose a Closed Bridge, you will be expected to fully repay the loan by a pre-determined date.
Once you’ve overcome this hurdle, you then need to decide how to resolve the interest. Note that Bridging Loans typically carry a high rate of interest which can range from 0.7-1.5% per month, but can be higher still depending on individual circumstances and the complexity of the agreement. Nevertheless, there are 3 repayment options available:
Monthly Interest Payments: Using this option, you will be required to make interest payments at the end of each month until the Principal on the loan has been fully repaid.
Rolled-Up Interest: Here, the total amount of accumulated interest is combined with the total amount of money that you have borrowed. When you’re due to settle the loan, depending on which product you’ve chosen, both interest and the Principal is repaid in a single final payment. Note that this will increase the size of the final payment, so you need to be certain that you can afford this option.
Retained Interest: With this option you are, in fact, borrowing the interest that would be accumulated for an agreed number of months on top of the money that you are already requesting. The amount of interest that you’re borrowing is then retained by the lender but is designed to offer you a safety net as you make monthly interest payments until the loan’s Principal has been fully repaid. If you haven’t used up all of the interest that was retained, or you’ve managed to fully repay the loan early, lenders may reimburse a portion of the retained interest that wasn’t used.
Need help investing in your property portfolio?
With property in the UK being a precious commodity, you’ll, naturally, want to enhance and ensure the quality of your portfolio. However, the challenge that many business owners and landlords run into is a matter of cash. Without the necessary funds at your disposal, achieving your goals without depleting your savings can feel like a long-shot. Fortunately, applying for Property Development Finance could pave the way forward. All you need to do is source the most appropriate agreement for your needs.
At Rangewell, we’re an Access to Finance specialist who have mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use and we’ll also guide you through the application process. We’re with you every step of the way. So if you’re looking to invest in your portfolio, apply for Property Development Finance today or find out more with Rangewell.
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