Jun 18, 2021
If you’re new to property finance this guide on the different ways to raise finances to fund your property purchase should help you make an informed decision regarding the type of financing that best suits your financial position along with what’ s suitable for the property type you are looking to buy.
While there are definitely great financial opportunities involved in property development, there are equal risks.
A definite risk is raising funding for the property development that you cannot afford in the long-term, you can easily ruin your credit rating with any missed payment, or create the possibility of getting yourself into debt.
The other key risk associated with property development is the property’s actual depreciation in value. It is an inherent risk when you invest in the property market, which means that you are at the mercy of markets and the sentiment that shapes it on a daily basis.
One thing you can control, however, is the type of finance that you apply for. To help you make the right decision, we have set out the key differences between the different available property investment loans.
Commercial mortgages, as the name might suggest, are primarily used for funding the purchase of properties that aren’t your personal home.
You can use a commercial mortgage to acquire the rights to a ware house for an expanding or new business, to fund the opening of a new high street shop, or even for a business that’s looking to own its office space.
It is perhaps the commonest use of a commercial mortgage since it lets business owners, especially small business owners, to own their office space thus providing a permanent base for operations thus creating stability and a strong base for growth.
Established businesses usually face the least number of hurdles when it comes to securing commercial mortgages, but small businesses can too.
In many regards, commercial mortgages are very similar to traditional mortgages and work in much the same way. The great benefit of commercial mortgages is the possibility to spread repayments over an extended period.
To land a commercial mortgage, businesses will need an exceptional track record and credit history, but that shouldn’t discourage ambitious businesses from applying for one.
If you are looking to buy a property as an investment by renting it out, then a buy-to-let mortgage is ideal for you. You cannot use this type of finance if you plan to live at the same property as a live-in landlord.
For landlords, a primary benefit of buy-to-let mortgages is that they usually have favorable rates compared to other types of business finance.
A buy-to-let mortgage is a type of secured funding that’s used by landlords looking to buy a property to rent out to tenants thus generating income for the landlord.
When deciding whether a buy-to-let mortgage will be suitable for you, it is important to note that they require a much higher minimum deposit compared to a residential mortgage. Not just that, but this form of finance usually attracts higher interest rates.
If you lack the resources to cover the associated inflation costs, this can cause greater financial strain.
Bridging loans are one of the most popular forms of finance for property developers.
If you are a property developer that wants to act quickly before funds are released from another property that you are selling, you can use a bridging loan to complete the purchase.
A bridging loan can also be taken out by a property developer that wants to do more extensive work on their existing property or plans to build a property from the ground up.
The type of funding that’s best suited to a property developer will depend on the scale of the development they want to build. The extent of the building work required in a development has a significant impact on determining whether a buy-to-let or a bridging loan is right for you. That’s because extensive property developments usually require extra funding.
Developers should typically consider bridging loans if their development is categorized as a heavy refurbishment or a ground-up development.
A heavy refurbishment includes changes made to the aesthetics of a property, which includes knocking down or moving internal walls, rewiring, and replumbing. A ground-up development, on the other hand, involves constructing a new development from a previously unused piece of land.
Bridging loans are thus ideal for private individuals and landlords that want to redevelop a property to improve its potential sale value. They are also suited to property developers looking to construct new properties on a massive scale, such an office building, a new block of apartments, or a shopping center.
Bridging loans have a shorter duration than other loan types. They are intended to serve as the financial ‘bridge’ between other types of longer-term financial options and have to be repaid in the term agreed. If the project fails to go according to plan, bridging loans can quickly turn into an expensive form of borrowing. Always ensure that you are clean on these before you ever consider one.