Bridging loans are ideal short-term, asset-backed financing options for businesses seeking to grow and expand. Let’s discuss how land bridge financing works and its role in supporting the UK’s development sector.
In 2024, we’ve seen the price of land development fall significantly year-on-year, providing an opening for ambitious business owners to take advantage. Bridging loans are ideal short-term, asset-backed financing options for businesses seeking to grow and expand.
Let’s discuss how land bridge financing works and its role in supporting the UK’s development sector.
What is a land bridging loan?
Land bridging loans are short-term financing options secured against land, properties, and other assets. These loans can be used to purchase or refinance land in a matter of days, with investors and development companies using them for everything from securing short-term opportunities to obtaining planning permission.
Bridging loans provide quick financing that other financing options don’t. Whereas a traditional mortgage might take months to approve, you can acquire all the funding you need in days with a bridging loan.
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How is land bridging finance used?
The UK offers one of the most lucrative markets in the world for residential and commercial real estate. In 2022, the UK’s commercial real estate market was worth £1.3 trillion, making it the second largest market in Europe behind Germany.
Land bridging finance has been a significant contributor to successful projects nationwide because of its versatility. Some of the ways you can use these loans include:
It’s true that bridging loans are more expensive than traditional business loans and mortgages, but they more than make up for these downsides through their flexibility.
Types of land suitable for bridging loans
Any plot of land in the UK is technically eligible for funding using bridging loans. However, your rates and how much you can borrow will naturally change based on the perceived risk to the lender.
Examples of land purchases you can fund using bridging loans include:
Whether a piece of land has planning permission or doesn’t have planning permission or whether the land has existing structures or not isn’t necessarily a barrier to achieving bridging financing for your purchase.
Costs associated with land bridging loans
All loans come with extra costs. In the case of land bridging loans, most lenders won’t offer more than 75% of the costs, meaning you’ll need to put down a 25% deposit. Other costs potentially associated with bridging loans include:
You may also encounter broker and exit fees. Broker fees are paid by the lenders themselves, and exit fees are fast becoming a thing of the past. Generally, it’s recommended that you avoid lenders who still levy exit fees.
Eligibility for land bridging finance
Individuals and businesses can apply for land bridging finance in the UK. Every lender can set their own eligibility criteria. For example, some lenders may prefer to avoid working with first-time property developers.
Here’s a rundown of the most basic lending criteria:
No proof of income is required because most bridging loans use rolled-up interest, meaning you’ll repay the principal plus interest in a single lump sum at the end of the loan. Likewise, even though lenders will perform a credit check, this is less important because the loan is secured.
Lenders typically focus on the value of the land, your plans for the land and your exit strategy as their primary considerations in deciding whether to approve your loan application.
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Risk considerations for bridging loans for land
No two bridging loans are the same because lenders will change their terms and rates based on the perceived risk. High-risk projects will command higher rates and less favourable terms, whereas strong applications could even take advantage of 100% financing with extra security.
So, how do lenders assess the concept of risk?
For example, a brownfield site with an abandoned petrol station sitting on it without planning permission for what you want to do would be considered incredibly risky. Likewise, a piece of land on the outskirts of a growing neighbourhood in London with existing planning permission would be much less risky.
High-risk projects can still get approved for financing, but you can expect your borrowing costs to increase as a result. Ultimately, lenders want to know what you’ll use the money for and how you’ll repay them – and the chances that you won’t be able to repay them.
Can you use a bridging loan to buy land at auction?
Using a bridging loan to buy a property at auction is one of the most popular reasons businesses use these loans. Auction houses across the UK often feature plots of land far below the usual market price, enabling investors and developers to snap up prime opportunities.
The downside of auctions is that you need significant cash flow or alternate financing to actually take advantage of these opportunities. Under UK law, all auction purchases must be completed within 28 days, or you lose your right to buy. Likewise, winning bids require a deposit on the day of the auction.
Most people don’t have hundreds of thousands of pounds in their back pockets to pay cash, which is why bridging loans are so powerful. You can seize these opportunities because bridging loans can be approved in days.
Here’s how that might work:
Developer A wants to buy a piece of prime development land at auction. They secure a winning bid of £1 million, which must be paid within 28 days.
They apply for a bridging loan outlining their plans, and because their lender moves quickly, they receive their funds within seven business days. With their £1 million in hand, they complete the purchase of the property and develop it over a 12-month period.
Once they sell the developed land or refinance into a traditional mortgage, they use these proceeds to repay their bridging loan plus any interest.
As you can see, bridging loans are powerful financial vehicles for bringing your vision to life. At Hilton Smythe, we understand how complicated financial planning can be, so we leverage our decades of experience to support businesses in securing the funding needed to proceed with their land purchases. To learn more about how we can help, contact us today.