One of the most powerful weapons in a property finance arsenal are bridging loans for land.
Speed, flexibility, and the ability to secure assets that no one else can touch. And the great news is…
The UK bridging market has absolutely boomed in recent years.
According to West One Loans, bridging loan books are now expected to reach £12.2 billion by the end of 2025. Staggering numbers.
But when it comes to buying land specifically? Well, that’s a whole different ball game. Lenders view undeveloped land very differently from bricks and mortar. Getting to grips with how land bridging loans work can make all the difference between winning your site and losing out to someone else.
So read on to discover exactly how to tackle land finance today…
What This Guide Covers:
- What Makes Land Bridging Loans Different
- Why Traditional Lenders Avoid Land Finance
- Key Factors Lenders Consider
- How To Structure Your Exit Strategy
- Common Mistakes To Avoid
What Makes Land Bridging Loans Different?
Purchasing land is not like buying a residential or commercial property. Bridging loans are short-term solutions to finance the purchase of sites.
The difference is this:
There’s no rental income. No immediate cash flow. It’s just the land itself.
As such, banks and high street lenders shun these deals. But there’s good news!
Bridging finance and specialist lenders understand that the value of land can increase exponentially when planning permission is granted. In some cases, values may increase 5-10x in worth with the granting of planning permission.
That’s a lot of profit in anyone’s book.
Of course, most bricks and mortar bridging loans are far more straightforward to arrange. High street lenders only touch residential and commercial properties with predictable valuations and rental yields.
This is where bridging comes into its own. Bridging lenders are more focused on the asset itself, your track record, and most importantly, your exit strategy than plugging figures into affordability calculators.
Why Traditional Lenders Avoid Land Finance
So why are traditional mortgage lenders so averse to land finance?
Traditional lenders are notoriously rigid.
They like to see:
- Completed structures
- Transparent rental income
- Established property types
- Lengthy application times
Land doesn’t match any of these criteria.
Consider this. A field with planning permission for housing is a great example of a tricky land finance scenario. Purchasers assume that there’s no problem getting planning permission because it’s been granted already. But in reality, it could easily be contested. The timescale is always uncertain. And until those houses go up, the land is not producing anything.
Lenders don’t want to get into these deals. Their systems are geared towards simple residential mortgages. Not complex, potentially risky land purchases.
So you see, bridging lenders look at the deal from a completely different angle.
They focus on the potential value of the asset and your track record with land deals. They understand planning and can move much more quickly when the right opportunity appears.
In fact, according to Mintel research, the bridging market is predicted to grow by 25% over the next five years. Speed and flexibility are the main reasons for growth.
Key Factors Lenders Consider
When it comes to applying for land bridging loans, lenders will focus on a few key areas in particular.
Planning Status
Land with planning permission? Outline permission? Or is it an agricultural land purchase with development hopes?
Existing planning approval will result in higher loan-to-value ratios (LTVs). Lenders are more confident because the development route is more straightforward.
If there is no planning permission then LTVs and interest rates will be less favourable. It’s a higher risk and lenders will reflect this with higher rates and smaller loan amounts.
Location and Demand
Site location is hugely important.
A plot in a prime residential spot will achieve better LTVs and interest rates than a rural plot in an area with low demand.
Lenders need to have confidence that the land will be able to be sold on or redeveloped for profit in a reasonable period of time.
Your Track Record
Land and development experience is key.
Do you have a proven track record of completing land purchases and developments?
Bridging lenders will be more open to working with developers that can demonstrate knowledge of the process and market and have completed a number of transactions successfully in the past.
However, there are plenty of first-time land purchasers that can secure loans. But being able to talk with some degree of authority about the development process will boost lender confidence.
Valuation Complexities
Valuing land is a more complex process than a house price.
Lenders will need to commission specialist land valuations that look at the highest and best use of the site and involve a certain amount of speculation around permitted use.
Expect this to take time. Budget for a few weeks when planning your application.
How To Structure Your Exit Strategy
In bridging finance, the exit strategy is absolutely everything.
Bridging lenders must have 100% clarity on how the loan gets repaid at the end of the term. In the case of land bridging loans, the most common exit routes are:
Sale After Planning Permission
Buy agricultural land, secure planning permission, and sell to a developer at a healthy premium. This works well if you have planning expertise and local knowledge that gives you an edge.
Development Finance
Use the bridging loan to purchase the site, then once planning is approved, refinance onto a development loan and use this to fund construction. The end product can then be sold or refinanced onto a long-term mortgage portfolio.
Outright Sale
Sometimes the exit is simply to sell the land. Perhaps the market changes. Or you find a more attractive opportunity elsewhere and sell for a clean profit that repays the bridge loan in full.
What you need to remember…
Your exit must be realistic. Don’t make assumptions about planning timescales, construction costs, or sales values that could raise lender eyebrows. Stress-testing of your assumptions will take place.
Common Mistakes To Avoid
Land bridging loans work exceptionally well when handled correctly. But avoid these common mistakes…
Underestimating Timelines
Allow plenty of time for planning and appeals. Planning applications take time. Allow for it. A six-month bridge that ends up becoming 12 months doubles the interest costs.
Ignoring Professional Fees
Arrangement fees, valuation fees, legal costs and potential extension charges. They all add up quickly. Factor them into your calculations right at the start.
Weak Exit Planning
Hope is not a strategy. If your exit strategy is based on a string of potentially uncertain events then lenders will reject your application out of hand.
Choosing The Wrong Lender
Some bridging lenders specialise in land and have years of experience in the field. If you partner with these lenders you will avoid a whole host of problems right at the start of your process.
Overlooking Site Issues
Everything from access rights to contamination, flood risks to restrictive covenants. These things can and do stop land purchases in their tracks. Be aware of and conduct proper due diligence before committing to a purchase.
Wrapping Things Up
Land bridging loans can be an excellent investment or development tool. But to succeed, you must understand how to get them in the first place.
Planning is the name of the game.
Budget for it. Plan for it. Get professional advice on it.
Wrapping all that up and packaging a land deal with proper, sensible due diligence into a bridge loan can be extremely lucrative.
Work with the right partners.
Know the market. Know the planning process.
Build timelines with buffer in place. Secure a loan with realistic terms and an exit strategy with multiple options that lenders will be comfortable with.
The opportunities really are out there. The finance is available. But it does take work and an investment in preparation to get it right.
You can achieve great things with the right bridging finance, property, and advice behind you.
Just make sure you find the right people and get on with it.