Property Development Finance

Purchase a property for development by using bridging loans

Seen a potential money spinner?  Driven past an old and empty dilapidated Victorian terraced property and dreamed of ending your day job and using your skills to help turn this wreck in to something you and the local community could be proud of.  Maybe it can be turned into 4 x 2 bedroom flats.  Because of the run down condition a traditional mortgage would not be suitable to finance this project so why not use a bridging loan to buy and then once the work is complete and the house is split into 4 separate units these can either be transferred to a traditional mortgage and the properties rented to provide an income or they can be sold in part or as a whole hopefully for a big profit.

There are two main types of bridging loans on the market: a closed and an open bridging loan. When a lender offers a closed bridging loan they are lending to homeowners who are looking to purchase a new property and have already exchanged contracts on their existing property. Financial institutions are far keener to lend money on closed loans as very few house sales fall through once contracts have been exchanged making the investment more secure. Someone who requires an open bridging loan generally has found the property they wish to buy and is looking for finance to secure its purchase but has not yet sold their current property. This is less appealing to lenders as a buyer has not already been lined up for the exiting property so their money is in more danger of not being paid back.

Example:

You have the opportunity to purchase a property at a very low cost but it is currently has an extreme need for refurbishment. With only a fraction of the cost to purchase and fully renovate the house the property could be valued at a substantial amount once completed and therefore make a sizeable amount of profit. You have looked at obtaining a mortgage but have been refused as the property is currently unmortgageable due to its current stat of repair. You could obtain a bridging loan secured on the property to purchase and renovate and either refinance with a mortgage or sell and release your profit upon completion of the property.