Funding a property project is a major decision that will impact the success of your investment. No matter your reason for purchasing a property, understanding your funding options is crucial. If you’re not sure which funding method is right for you, we’ve broken down the main types of funding below to help you make an informed decision.
Understanding your funding needs
Before exploring funding options, you must assess your needs. Begin by considering the type and scope of your project. Whether you’re purchasing a property, renovating or developing from scratch will depend on which funding route is best.
You’ll also need to assess how quickly you need your funds. Some options are faster than others which will influence which method you go for.
Are traditional mortgages right for me?
Traditional mortgages are a common choice for property funding, especially for residential
purchases. Here are some of the most notable benefits and disadvantages:
Pros:
Lower interest rates: Even though mortgage interest rates are high, residential mortgages usually have lower interest rates compared to other forms of borrowing.
Long repayment periods: Repayment terms can extend up to 30 years, making monthly
payments more manageable. This can be helpful as living costs continue to rise.
Fixed or variable rates: You can also choose between fixed-rate mortgages, which provide stability and variable-rate mortgages, which can offer lower initial rates.
Cons:
Stringent eligibility criteria: Traditional banks require thorough credit checks, income
verification and property assessments, which can be challenging.
Slower approval process: The approval and disbursement process can be lengthy,
potentially causing delays in your project.
Large deposits required: Mortgages often require significant down payments, usually
around 10% of the property’s value.
Bridging loans
Bridging loans are short-term loans designed to bridge the gap between the purchase of a new property and the sale of an existing one. Bridging loans offer quick access to funds as they can be approved and disbursed quickly. They’re also more flexible as they can be used to buy properties but also things like renovations or developments.
However, there are also drawbacks to consider. Bridging loans often come with higher interest rates compared to traditional mortgages, which can increase the overall cost of borrowing. They also have shorter repayment terms, typically requiring repayment within 6 to 12 months. This short timeline can put pressure on you to repay, especially if you’re unable to sell your existing property within the loan term.
Government schemes and grants
There are also some government schemes and grants that you can make the most of if you’re a UK resident. For example, you might be eligible for:
A home at a reduced price for first-time buyers
A home through shared ownership schemes
A loan to cover the costs of building a home or hiring a builder
A loan to help with the expense of a new-build home for first-time buyers
Peer-to-peer lending
Peer-to-peer lending and crowdfunding connect property developers with individual investors, bypassing traditional banks. Peer lending platforms can give you quick access to capital and flexible terms. Although it sounds great, peer lending can involve higher risk and repayments as well as less legal protection.
Final thoughts…
How to fund your property is an important decision. But it’s not impossible. By assessing your needs, you can weigh up the pros and cons of each funding option to help you make your choice. Once you’ve decided on this, you can realise your property ownership dreams.
