Buying or refinancing a property sometimes needs to be done quickly. It might be that the property you need has just come onto the market and you have no time to lose to secure it.
You may need short-term funding to deal with a delay in long-term funding to continue with your buying, building and renovation plans. You may need quick cash to resolve unforeseen costs with a project you have already started work on.
Whatever you need, we can offer a short-term solution to help you!
What is property development finance?
Property development finance is a type of lending that can help you fund the construction of more than one property on one title. Most lenders will split the property development process into two parts, these are:
Residential: Most lenders will define residential property development as smaller-scale developments of up to four different units. This form of lending comes with standard fees and charges and is considered less risky of the two.
Commercial: If your development is more extensive than four units, lenders will consider this commercial development. This kind of application can be more complex and may come with a higher interest rate to protect the lender against risk.
This type of lending covers everything from term loans, mortgages, bridging loans, and personal loans.
What short-term finance options are available?
In all these scenarios, you need to have a quick and simple short-term property loan. But what are your options for a short-term property loan?
How do Bridging Loans work?
A Bridging Loan is a short-term loan secured on the property itself. It’s called a Bridging Loan because it is designed to bridge a short-term funding gap. Bridging Loans are usually repaid quickly, either by the sale of the property or by another finance product designed for the longer term, such as a mortgage.
It can be used in a number of ways. This type of loan was basically designed to bridge the gap between the sale and purchase of properties - but it has become popular for a number of other purposes.
- You can secure funding with a Bridging Loan using the equity of your existing property to enable you to purchase your next one - this means that you don’t have to arrange a sale before buying another property (vital to ensure you don’t miss a bargain in a fast-moving market)
- You can use a Bridging Loan secured on a property you want to buy. This can help you arrange funding quickly - in a matter of days - while you search for the long-term funding solution you need
- You can buy a property that is not mortgageable - such as property requiring renovation - and do the work allowing you to take a long-term funding solution. (Traditional lenders - high-street banks and buy-to-let lenders - will not lend when the property is not in an immediately habitable and lettable condition)
- You can use a Bridging Loan as a refinance solution
- Provide funding for development. Unimproved land, obsolete and even derelict buildings which are not suitable for mortgages can be bought with a Bridging Loan. A large-scale bridge may be a simple way to fund both acquisition and development
- Bridging Loans are often used to fund property purchases, but there is no restriction on how funds can be used. So if you are faced with a sudden expense - or if you need finance to take advantage of an opportunity - a Bridging Loan secured on a property you already own could provide the answer
The property can be residential, such as buy-to-let flats, or commercial, such as offices, factories or warehouses. The loan can be used to buy the property itself or as funding for any other business purpose. Loans are usually for between £100k-£2m, although they start at around £25,000 and there is no maximum.
A Bridging Loan can be arranged fast
Bridging Loans are intended to let you deal with urgent needs or to take advantage of opportunities as they come up. It is, therefore, essential that you can have the loan agreed and the funds you want in the shortest possible time - and that lenders understand the urgency.
Bridging Loans can be arranged within a matter of hours and funds released in as little as 72 hours, under certain conditions
Remember that large amounts of money are involved and lenders offering Bridging Finance will carry out detailed checks and apply strict lending criteria - but are able to make rapid decisions because they can work without the bureaucracy that slows down many traditional lenders.
What do Bridging Loans cost?
Short-term finance is always more expensive than long-term lending. The costs of Bridging Finance can be relatively high but, because loans are for the short-term, the overall cost may have little actual impact on the long-term costs of a major purchase.
Interest rates charged will vary, depending on your circumstances and your business and the deal to be funded. Current rates can range from 0.7-1.5% per month, with even higher rates for more difficult propositions. The actual cost will depend on a number of different factors. The size of the loan and the purpose of the funding will be important factors. It will also be essential to have an exit strategy in place, which can include refinancing or the sale of the property.
In addition, there may be a number of fees, including an arrangement fee (which can be 2% of the loan amount), an exit fee (which can equal one month’s interest) and surveyors’ and legal fees. If the loan runs over the agreed term there will also be substantial penalty fees.
Repayment arrangements can vary. You may need to make monthly repayments on a bridge but, in many cases, all fees and interest can be rolled up into the loan which can be settled with a single repayment.
If you are using a Bridging Loan as a short-term solution for a property purchase, it can often be paid off by a solution designed for the long-term, such as a Commercial Mortgage.
Finding a bargain property is difficult in the current market, but property auction may be one way that you can still find a low-cost flat, house or commercial property. Property auctions can provide properties that might otherwise be difficult to sell, such as those in poor condition or have been repossessed by a lender as a result of mortgage arrears. They are popular among investors, looking for property to let out, and for developers, who may be looking for property in need of substantial work before resale at the full market price. Property may not be in a lettable condition or be otherwise unmortgageable. It may need renovation or even structural repair, or it may even be bought for planning gain and redevelopment.
But buying at the auction house means a financial challenge. You will need to be able to provide a large cash sum at very short notice. Very few people have the funds to buy a property as cash, even at auction prices. This limits the number of potential buyers and, with it, the resale value, providing an opportunity for property professionals - if they can secure the funding required.
However, buying at an auction requires cash. The precise arrangements vary with different auction houses but with most auction sales, when the gavel falls on your winning bid you will be expected to pay a 10% deposit of the hammer price immediately.
You will then be required to pay over the balance of funds, which will include the auctioneer's commission, usually within 28 days.
Failure to provide the full funds may lead to you losing both the property and your deposit. Conventional solutions that can provide a high level of funding for property buying simply cannot be arranged in the time available.
Auction Finance is designed to be arranged quickly and provide the level of funding you need in the necessary timescales. It is basically a type of term finance, similar to a Bridging Loan. It is designed to help you purchase properties at auction because it can be arranged extremely quickly. It can be used for virtually any type of property, whether for residential, commercial or mixed-use and regardless of whether it is habitable or not.
It can also be used to purchase land.
Auction Finance, like other Bridging Loans, is designed for short-term use only. The loan can be as short as one day and run up to a maximum of 12 months. It is relatively expensive compared with a conventional mortgage but it does make it possible to raise the funds you need at short notice. Loan amounts start at around £25,000, and there is no maximum.
Finance can be arranged within a matter of hours, and funds released in as little as 72 hours under certain conditions – although it may be prudent to approach a lender and to get an agreement in principle before you commit yourself.
You will need to have an exit strategy when you take out high-cost lending such as Auction Finance. The most appropriate long-term funding solution will depend on the property and how you will use it but can include a Commercial Loan secured on the property itself, or a conventional or buy-to-let mortgage.
What does Auction Finance cost?
Short-term finance is always more expensive than long-term lending. The costs of Auction Finance can be relatively high, but because loans are for the short term, the overall cost may have little actual impact on the long-term costs of a major purchase.
Interest rates charged will vary, depending on your circumstances and your business, and the deal to be funded. Current rates can range from 0.7-1.5% per month, but fees and interest can be rolled up into the loan, which can be settled with a single repayment.
In addition, there may be other fees, including arrangement and exit fees. If the loan runs over the agreed term there will also be substantial penalty charges.
Interest-Only Commercial Mortgages
A short-term interest-only mortgage requires the borrower to pay off the interest each month. The full loan amount is usually due at the end of the loan term - when the property is sold on, or when another type of funding is available.
Because of the costs of setting up a Commercial Mortgage, it will be uneconomic to borrow less than £50,000 - and some lenders set a minimum of £75,000 or more - but there is no set upper limit. So, if your plans involve large-scale acquisitions such as an industrial park or a major city-centre building, it may be possible to provide the level of funding you need with a Commercial Mortgage.
Tracker, offset and fixed-rate options may all be available.
What about the cost?
With all types of property finance, securing the most competitive interest rate will be crucial. Lower rates mean greater profits and easier cash flow - although in some cases, all fees and interest can be rolled up into the loan, which can be settled with a single repayment.
A short-term loan allows you to take advantage of the best rates available because you won’t need a fixed-interest loan due to the short lending period. They also offer the chance to make quick decisions on buying new properties or can help save you if your property needs desperate refurbishments or repairs.
There will also be fees:
- Arrangement fees are charged by the lender for arranging the loan and are typically 1.5% to 2% of the loan amount.
- Valuation fees cover the costs of a surveyor to value the property both before and post refurbishment works. The scale of these fees will depend on the size of the project.
- Exit fees are not applied by all lenders - those that do may charge a percentage of the loan amount or, sometimes, the gross development value. The costs offered by different lenders will vary considerably, and negotiation is possible - especially you have the support of the Rangewell property team.
What are the criteria for Short-term Finance?
All short-term finance lenders tend to operate differently, so their criteria may be very different. To find the most suitable short-term finance a good broker will need to know the following:
- The experience of the borrower(s)
- Current income level of the borrower(s)
- Credit rating of the borrower(s)
- Basic information about the proposed property
- The borrowing vehicle, whether a personal or individual name, a Limited Company or a limited liability partnership.
- The source of the deposit
It's essential for a lender to fully understand a borrower's situation so the lender can tailor products suitable for a specific scenario to allow for a smooth and efficient process.
Raising funds with Short-term Property Finance
If you are looking at the most cost-effective way for your business to raise cash, your business' property may provide the solution with property remortgaging or refinancing.
If your business has its own premises, you could have a valuable and appreciating asset - which you may be able to use to secure short-term funding.
If you own the property outright, all the money you raise is yours to use in any way you wish. You can also refinance a property with an existing mortgage, repay your original loan and use any surplus cash to help build your business. You regain full title to your premises when the funds are paid off and can take advantage of rates that are exceptionally low.
Refinance can also help reduce the cost of existing property finance obligations because you do not need to have paid off your current mortgage to arrange a new one. You may be able to pay off an existing loan and replace it with a new one at a lower cost.
Business Property Finance from Rangewell
Buying any type of property will involve high costs, and it is important to have expert help to get the kind of funding that is right for your particular plans
At Rangewell, we work with lenders across the market and have access to the full range of property funding products. It lets us use our property finance expertise to support you – and ensure that you have the financial solutions you need.
And it is essential to get that expertise - even a fraction of a percentage point can make a substantial difference to what you actually pay, while fees and penalties can complicate the position.
At Rangewell, we know the lenders who can offer all types of Property Finance, and we can use our expertise to identify the deal that really is the most appropriate for you. Our knowledge can not only help you secure the funding you need - it can save you a great deal of cash.
ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE