A Guide to Property Finance by David Soffer

Thursday, 18 May 2017
Property finance is certainly nothing new, with mortgages and other types of finance having been around for many years. However, in the last few years, with banks and traditional high street lenders being a lot tougher with applicants and reducing the numbers of people they will lend to, specialist lenders have established themselves in the market.

Many of these specialist brokers and lenders help customers secure a plethora of property finance, from bridging finance, to development and self-build finance (source: SPF Loans).

It is important to be aware of the options out there, which are best suited to each specific person’s needs and when to apply for each kind of property finance. For example, a first-time property buyer would be very unlikely to require bridging finance. The beauty of these specialist lenders is that they will tailor the funding package to your needs and requirements and will not apply a ‘one size fits all’ approach.

There are, however, some types of finance for properties and developments that are much more common than others, and these are the types of finance that need to be well understood before delving into more detail and into the specialist finance market.

Bridging Finance

Bridging loans are being increasingly utilised by a range of different customers, with the bridging lending industry now worth more than £4 billion. These loans are diverse and can sometimes make all the difference when it comes to being able to make a property purchase or significant investment within a tight time frame. The beauty of bridging finance is that it is available very quickly and covers large amounts, typically for property purchases.

Bridging loans literally ‘bridge a gap’ between the purchasing of a property and a pre-determined event that will pay off the loan.

For example, a homeowner is looking upscale and has found the perfect property. They find a buyer for their current home and use all their savings on the deposit for their target property. However, at the last minute, the buyer of their current home pulls out of the process. This would normally leave the seller in a predicament: either find a buyer quickly or lose tens of thousands of pounds on the lost deposit.

Bridging loans can solve this problem. Say their current property is worth £500,000 and the new property they wish to purchase is £750,000 at the time when quick funding is needed. The deposit on the new property covers £150,000, leaving £600,000 outstanding. The homeowner can get a bridging loan for the full £600,000 while they await the sale of their initial property.

Once the sale of the initial property goes ahead, the money from that (£500,000) goes towards the bridging loan repayment and the further £100,000 plus any additional charges can be borrowed as a mortgage against their new property, covering everything in a smooth and efficient way, allowing the customer to secure their purchase.

Self-Build Finance

Self-build finance is a very specific type of property loan and, as the name suggests, covers self-build projects. Whilst building one’s own home is hugely exciting and something that most people never get to do in their lifetime, a great deal of organisation and arranged finance is usually necessary.

The difference between self-build and other types of property finance is that whilst other types of finance such as development or bridging finance are lent in one go; as a lump sum to cover a determined amount, self-build loans are released in stages. This reflects the nature of building a home, which is done in stages.

Typical stages of a self-build property include: purchasing the land, initial preparation and foundations laying, constructing the ‘frame’ and structure of the property, and the completion stage, which will require additional services such as ventilation testing and commissioning under Part F of Building Regulations (source: RJ Acoustics).

However, each of these stages will cost different amounts and therefore it isn’t necessary for the lender to release the entire amount in one go. Whilst this may seem like a hindrance, in fact it is of huge benefit to both the lender and the borrower.

Because the money is released in these logical stages, the money will start to be repaid immediately and in stages too. This means that the loan is a much less risky prospect to the lender than if it were all lent in one amountat once. This is reflected in the respectively cheaper cost of these loans than compared to say a bridging loan, in some cases.

Furthermore, in the worst cases, should the borrower default, they will be liable for the loan amount plus interest on what was has been released and not what was projected.

Development Finance

Development finance, as the name suggests, refers to loans that are utilised by property developers. This type of finance also incorporates a few further types of loans including refurbishment finance, mezzanine finance and others. However, the common denominator is that the loan will be used to ‘develop’ something in some way.

Two common uses for this type of finance are:

Purchase and Development of Land – This is a common use for these loans by property developers looking to expand their property portfolio. They may own 10 properties, but have none of the capital available to use immediately for the purchase of further assets. Therefore, a development loan can be secured on one of the properties from their existing portfolio and repaid via the sale or refinancing of one of their existing properties or the new property.

Uninhabitable Properties – To sell a property for residential use it needs to be completely inhabitable. This means that there must be reasonable living conditions with basic facilities such as a working bathroom and kitchen. A development loan can be used to convert say a warehouse into a habitable development or it may be used to refurbish a property, providing it with a bathroom and kitchen. The subsequent sale of the property will pay off the loan and make a profit for the developer, making it very worthwhile.

David Soffer is a London-based SEO Consultant and part of Tudor Lodge Consultants who work extensively with various property finance firms, lenders and brokers ensuring they are found online.