How Does a Bridge Loan Work for Developers?

In the fast-moving world of property development, access to flexible financing is crucial for success. Developers often need quick funding to acquire sites, complete construction, or bridge gaps between project phases. This is where a bridge loan for developers becomes an invaluable financial tool.

What Is a Bridge Loan?

A bridge loan is a short-term financing solution designed to help property developers cover funding gaps. Typically lasting between 6 to 24 months, these loans provide quick capital to acquire, refurbish, or complete developments before securing long-term financing or selling the asset. Unlike traditional mortgages, bridge loans focus more on the value of the property and the borrower’s exit strategy rather than income or creditworthiness.

How Bridge Loans Benefit Developers

For developers, bridge loans provide several key benefits, including:

• Fast Access to Capital: Lenders can often complete the process within weeks, allowing developers to move quickly on opportunities.
• Flexible Terms: Loan structures can be tailored to project timelines and financial needs.
• Enables Property Acquisitions: Developers can secure a site while arranging long-term financing.
• Facilitates Refinancing: If a project is near completion, but the long-term mortgage isn’t available yet, a bridge loan can help with refinancing.
• Covers Construction Costs: Some lenders provide funds for both acquisition and development, reducing upfront equity requirements.

How Does a Bridge Loan Work for Developers?

1. Application and Approval Process

The process of securing a bridge loan is usually faster than traditional property financing. Developers need to provide:

• Details of the property or development site.
• A business plan or project overview.
• Financials, including projected Gross Development Value (GDV).
• Exit strategy (e.g., refinance with a mortgage or sell the completed development).
• Experience and track record in property development.

2. Loan-to-Value (LTV) and Loan-to-Cost (LTC)

Bridge lenders typically offer loans at a percentage of the property’s current or projected value.

• LTV (Loan-to-Value): This usually ranges between 60-75% of the property’s value.
• LTC (Loan-to-Cost): Some lenders may fund 70-90% of total development costs, depending on the borrower’s experience and the strength of the project.

3. Interest Rates and Fees

Bridge loans tend to have higher interest rates compared to traditional financing due to their short-term nature and the speed at which they are arranged.

• Interest Rates: Typically range from 0.6% to 1.5% per month, depending on the risk level.
• Lender Fees: Typically 2% of the total loan amount but can range from 1% to 10%.
• Broker Fees: Usually around £1,500 on application, 0.5% on offer, and 0.5% on completion.
• Exit Fees: Some lenders charge an additional fee upon repayment, often around 1%.
• Valuation and Legal Fees: Developers are responsible for covering these costs, which can vary based on the property’s location and size.

4. Drawdown and Use of Funds

Once approved, funds are typically released in stages:

• Day 1 Advance: A portion of the loan (e.g., 70-75% of the purchase price) is provided upfront.
• Development Drawdowns: Further funds are released at key milestones, subject to inspections.

5. Exit Strategy

A clear exit strategy is essential for securing a bridge loan. Common exit strategies for developers include:

• Selling the property: Once construction is complete, developers sell the asset to repay the loan.
• Refinancing onto a long-term mortgage: If the developer intends to retain the property, they refinance with a traditional lender.
• Securing additional funding: In some cases, developers arrange alternative finance solutions to replace the bridge loan.

Is a Bridge Loan Right for Your Development?

Bridge loans are an excellent solution for developers who need quick funding for site acquisition, construction, or refinancing. However, they come with higher costs and require a clear repayment plan. If you’re considering a bridge loan, working with an experienced mortgage broker can help you secure the best terms and structure a deal that aligns with your project timeline.

If you’d like to explore your options, get in touch with our team at Silver Oak Capital. We specialize in real estate debt advisory and can help you navigate the bridging finance landscape to find the most suitable funding solution for your development needs.