Property finance explained

The concept of property finance is nothing new, with mortgages and other loans secured on properties remaining a popular option for many in need of the money for all nature of purposes. From needing cash to start a business venture, to paying off debts or improving the property, there are many reasons to turn to this type of secured loan type.

However, over time, this industry has taken off to a greater extent that mortgages alone, with a huge variety of specific and bespoke offerings available for funding covering specific needs and requirements. The more bespoke property-related offerings available include the likes of bridging finance, development finance, self-build finance and much more (source: http://www.spfloans.co.uk/).

Interestingly, rather than being exclusive to banks and ‘traditional’ loan providers as was the case in past years, there are an increasing number of alternative and non-bank lenders offering these finance arrangements, as long as their application and qualifying criteria are met by the applicant. These finance arrangements though are almost entirely for investment and shorter term projects. For example, if one is looking to improve and expand a property but cannot afford the costs outright, they may turn to a loan specifically for that purpose.

It comes down to returns on investment and the end goal of the entire project and it should be kept in mind that none of these finance offerings are suitable as replacements for a traditional mortgage and whoever an applicant turns to, to apply for the relevant funding should be fully regulated by the UK’s Financial Conduct Authority (FCA) where necessary.

Popular types of finance in the UK

A multitude of options exist for those seeking to use a property or property development as a source of revenue and as an investment. The different types of property finance should be researched in detail to make sure that you take out the package and arrangement that is best suited to your specific needs and property aspirations. This is important, as the interest rates and amount you are offered, as well as the likelihood of being accepted are heavily reliant on the correct loan being applied for.

Bridging Loans – These loans are a short term finance arrangement that allows borrowers to ‘bridge the gap’ for property purchases. For example, if someone is selling one property but wishes to buy a second one before the first one’s sale is completed, a bridging loan can be the solution.  Rather than missing out on the second property as a result of not having the funds to buy it or put down the holding deposit, a bridging loan is taken out to cover this amount.

When the first property is then sold, the money from that sale is used to pay off the bridging loan whose funds were used to purchase the second. This is an efficient way to fund property purchases when funds are in the process of being made available for the second purchase, for example in the case of a property investor who buys and sells properties for profit. Bridging loans however will have higher interest rates than say a mortgage.

Since 2016, the bridging loan market has seen its value increase to more than £4 billion, reflecting the appetite of borrowers and lenders alike to invest in the property market, with the funding coming increasingly from non-bank lenders (source: http://techround.co.uk/).

Development and Refurbishment Finance – This finance is suitable for developers and those who wish to develop property sites. One of the biggest benefits of this finance is that even though it has interest at a higher than ‘normal’ rate, the money will be used to improve and increase a property and its value which will in effect, pay off the loan over time.

With some property refurbishments and improvements able to increase the value of a property by more than 20%, a tidy profit can be made by the property investor in time.

The potential return on investment that can be made will be looked at in detail by the lender as part of any application. In addition, with many of the ‘big name’ lenders of these types of loans not offering loans as universally as they used to, perhaps as a result of a somewhat volatile property market; there has been a sharp increase in the number of other lenders who have filled this void, offering these types of finance.

Self-Build Finance – Finance for self-build projects differs from other development finance offerings. Usually, a self-build property will be the main or home residence of the owner and therefore, the type of finance offered is often deemed to be a ‘regulated mortgage contract.’ This means that the way the loan is assessed by the lender is much more similar to a normal mortgage.

In addition, this finance is of less risk to lenders and in turn the borrower. Because there are a number of stages involved in the building of a property, the funds are released in stages, rather than in one go, as a lump sum. This also means that repayments will work in stages and the amounts repaid each stage will be lower for the borrower, keeping costs down.