5 types of property finance

17 May 2021

Whether you’re looking for investment in a large-scale property development project, want to renovate a buy-to-let or even invest in a commercial office building, find out what types of property finance options are available in the market and which option may be right for your business’s needs.

Types of Property Finance

Property finance is a great finance option for property developers and building companies who are looking to secure funds for a project.  When it comes to understanding what type of finance your business needs, it’s important to assess how extensive the project is, how long it will take, and how much it is likely to cost — considering a best- and worst-case scenario. 

Getting the right type of finance in place is crucial to the success of the property project you’re undertaking, whether that’s buying your company’s premises, or growing your rental portfolio.

It's also worth noting that property finance isn't exclusively for just property businesses, it can be used for any purpose such as to expand a business, to hire staff or refinance your business for growth.

The term ‘property finance’ applies to a variety of finance options including:

  • Commercial mortgages

  • Development finance

  • Bridging loans

  • Buy to Let

  • Second charge mortgages

Whilst there are more types of property finance options available, our panel of lenders at Funding Options, are able to offer these to UK businesses.

1. Commercial mortgages

If you’re looking to purchase property or land for commercial use, you might consider taking out a commercial mortgage to help fund your purchase. Commercial mortgages work the same as personal mortgages, letting the businesses pay off the loan over a certain number of years.

A commercial mortgage’s term can range from three years to 25 years, depending on the value of the property as well as the size of the deposit. If you’re looking to fund a property project or want to extend a portfolio, a commercial mortgage is a great option. If you have strong credit and experience you may be eligible to borrow up to 75% commercial mortgage. Another option that may be available to your business is to release equity from your property is a commercial remortgage, to allow you to release equity from your property.

2. Development finance

Created for businesses that need short-term funding to help pay for building and development costs, development finance is a type of property finance that has to be repaid within a tight timeframe; usually between 6 months and two years.

As the name suggests, the main reason you may need development finance is to fund a ground-up development project. It is a great finance type for developers or builders working on this type of project. If you are looking for a shorter-term loan option to help pay for the associated costs of a ground-up development, this may be right for you as one of the main reasons people apply for development finance, to fund new building projects or complete unfinished ones.

Builder at work creating development

3. Bridging loan

Bridging loans are commonly used by property buyers and investors but are suitable for a range of other business purposes too. They are a great finance option to help businesses get from A to B quickly. As the name suggests, they help to ‘bridge’ their finances over a short period of time.

A bridging loan allows you to purchase a property before you’ve sold your existing one. Bridging loans are often used by businesses who want to fund renovations or a new build project, before they secure a traditional mortgage. Due to the short-term nature of the finance, it’s sometimes referred to as a ‘swing loan’, ‘gap financing’ or ‘interim financing’. These kinds of loans usually have to be repaid within 24 months.

As long as you’ve got a way of paying off the loan and sufficient security, it’s possible to be eligible for a property bridging loan even if you’ve got a poor credit rating. Added to that, if you’ve got sufficient security, you may be able to borrow up to 75% of the purchase and up to 100% with additional security. This is often why a bridging loan is so popular with property investors. 

4. Buy to Let loans

Buy to let loans are pretty self-explanatory and let private landlords and property developers invest in properties to rent them out for a return on their investment. Many lenders suggest that landlords register a limited company before applying for this kind of finance, as there are different tax implications for limited companies.

Buy to let mortgage lenders will usually lend up to 80% of the total value so they’re a good option if you’ve got a good deposit too. Typically, the loan amount will be dependent on the rental income on the new property too. Buy to let mortgages are also used to release equity in buildings to help cover any legal needs or further investment. 

5. Second charge mortgages

Second charge mortgages are another great way for commercial and residential property owners to release equity from their assets to help invest in new or planned projects. Just like standard mortgages, second charge loans or mortgages allow companies to inject cash into their business, with a structured repayment plan.

As second charge mortgages sit behind the first charge, you avoid having to pay early repayment charges and disrupting the usually low competitive interest rate on the 1st mortgage charge.

The lenders can work up to 70% of the purchase minus the 1st charge mortgage, an increased loan amount is achievable with extra security.

Whether you’re a commercial landlord or first-time property developer looking to secure funding for property development work, start your property finance application with us today.

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Vivek Seda
Vivek Seda

Asset Lending & Property Team Lead

Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.

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