If you’re buying land, whether it’s to develop as a business or to build your own home, a bridging loan can be a good way to finance it if other options aren’t suitable.
Bridging loans are short-term finance designed to bridge the gap between needing to pay for something and being able to put longer term finance in place.
They have two major benefits over other types of loan. Development loans, which are used for building projects carried out for commercial reasons, and self-build mortgages, which are used to build your own home, usually require the land you are buying to have planning permission in place. If it doesn’t, you can use a bridging loan to buy the land instead.
Another benefit of bridging loans is that they are approved a lot more quickly than other types of finance. You could get the money in as little as two weeks, which means they are a good option if you need to raise funds quickly – so you don’t miss out on a good deal, for example.
Although bridging loans tend to be more expensive than other types of finance they are designed to be short-term loans until you can put other finance in place, with terms ranging from one month to three years.
Compare bridging loan rates
Table: sorted by monthly interest rate
Overall representative example for regulated bridging loans
If you borrowed £195,000 over a 1-year term at 8.40% p.a. (fixed), you would make 12 monthly payments of £1,399.93 and pay £211,799.16 overall, which includes interest of £16,799.16, a broker fee of £995 and a lender fee of £3995.00. The overall cost for comparison is 11.6% APRC representative.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
How bridging loans work to purchase land
You can usually borrow up to 70% of the cost of the land, known as loan to value (LTV), with minimum loans of £10,000 available.
The bridging loan is secured on the land you are buying. If you have additional assets, such as property you already own that can act as security, you could borrow up to 100% LTV. Bridging loans are generally available to all types of borrower for all types of land.
As well as interest on the loan, which you can either pay each month or “roll up” so that you pay it all off when you repay the loan, you may have to pay an arrangement fee of between 1% and 2% of the loan amount to the lender for setting it up.
The most important thing when you’re applying for a bridging loan is to have a viable exit strategy (how you plan to pay off the loan) in place as this is what the lender will pay most attention to when assessing your application.
This could be refinancing the land using development finance or a self-build mortgage to fund the building project once you’ve obtained planning permission. With both of these the money is released in stages as each phase of the building work is completed.
Alternatively, if you already have the money to do the building work, you might plan to sell the property when it’s finished and use some of the profits to pay off the bridging loan, as long as you can do this within the term of the loan. Or you might take out a commercial mortgage on the finished property if you’re going to use it as your business premises or let it to another business.
Lending criteria for bridging loans
Although the lender is likely to do a credit check and look at your personal finances when deciding whether to lend to you, these are less important than when you’re taking out a mortgage. If you’ve had credit problems in the past this isn’t necessarily a barrier to taking out a bridging loan.
The lender will focus more on the value of the land you are buying (and anything else being offered as security) and whether it offers adequate security for the loan, and whether your planned exit strategy is likely to be successful. If you’re planning to get a mortgage to pay it off, you may need to show you have a mortgage agreed in principle, which might be affected by your credit history.
It will also look at whether the land already has planning permission. If it doesn’t you could pay a higher interest rate, be restricted to borrowing a lower LTV, which could be as little as 50%, or be asked to put up additional security for the loan. The lender might also want to look at whether you have any experience of taking out this type of loan or developing land, especially if you’re planning to build on it for commercial reasons.
These factors will all affect the interest rate you are offered – the lower the risk the lender considers it’s taking on, the lower the interest rate you’ll pay.
How to find and compare bridging loans
It’s best to speak to a specialist bridging finance broker to compare loans as they will be able to look at the whole available market to find the best deal for you.
Lenders won’t grant you a bridging loan if they consider the land you’re buying to be too risky a proposition, so a broker can help you navigate the market and make sure you don’t end up paying a higher interest rate than you need to.
You’ll also have fewer lenders available to you if you’re buying land rather than property, especially if it doesn’t have planning permission, so a broker will be able to look at the lenders that will be best for your circumstances.
Pros and cons of bridging loans
The benefits of bridging loans to buy land are that they’re quick to arrange, can be taken out to buy land without planning permission and have a more straightforward application process than other types of finance.
However, the downsides are that they have relatively high interest rates and you will pay high penalties if you can’t pay off the loan at the end of the term, so you should make sure your exit strategy is solid.
Bottom line
Bridging loans can be a useful option for buying land if cheaper types of finance aren’t possible, but you should speak to a specialist broker to help you get the best deal.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
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