We explore the main types of real estate loans, how to use them, and how they work, as well as how non-traditional finance options can provide more flexibility and convenience for real estate investing.
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Real estate is a big investment – that’s why businesses and investors looking to purchase, develop, or refinance properties turn to real estate loans. Whether you're a property developer, an investor, or a small business owner, choosing the right options from the range of real estate loans available and understanding how they work can help you make better decisions for your project.
Real estate covers a wide range of potential costs and transactions – from purchasing land to funding development – so it’s no surprise that there are multipleoptions for financing. Let’s look at the most important ones.
These loans are used to acquire or refinance properties that generate income, such as office buildings, retail spaces, warehouses, or hotels. In that way, they’re different from commercial mortgages, which are used to purchase, develop, or upgrade commercial properties for business use.
Typically, CRE loans come with higher interest rates and can require larger down payments (20%-30%). Loan terms range from 5 to 20 years, often with a balloon payment at the end.
These are short-term loans used by developers to build new residential properties.
Loan amounts typically start from £50,000, with terms lasting up to 3 years. Interest rates are variable, and there are no early repayment fees. These are for financing large projects – for example, property developers building a new housing estate might use this type of loan to finance construction, with the aim of selling the units once built.
A buy-to-let mortgage is designed, as you might expect, for purchasing rental properties.
Lenders typically require a 15%-25% deposit, and the loan amount is based on the rental income potential of the property. Interest rates vary based on the amount of equity involved.
Bridging finance is a short-term loan used to 'bridge' the gap when immediate funding is needed, often in real estate transactions.
These are short term loans – often used for a period of 6 months to 3 years. They're built around speed, such as when purchasing a property at auction or for making a quick acquisition.
Development finance or property development loans are specialised loans for funding property construction or significant refurbishments to a building.
For these, lenders typically offer up to 70% of the property’s gross development value (GDV). Rates are higher due to the risk involved, and the loan is often released in stages as the project progresses.
This hybrid between debt and equity financing is often used by property developers when a traditional loan does not cover the full project.
Mezzanine loans sit behind the primary mortgage but ahead of equity, making them riskier and thus more expensive. They are typically used to cover gaps in funding, such as when developers need additional capital to complete a project.
Most real estate loans are secured by the property being purchased or developed. The loan terms, interest rates, and approval processes vary greatly depending on the type of loan and the lender. Lenders typically assess factors like the loan-to-value ratio (LTV), debt-service coverage ratio (DSCR), and the borrower’s creditworthiness.
For large loans, such as development finance or commercial mortgages, the application process can be lengthy, involving multiple rounds of due diligence, site valuations, and financial assessments.
The outcome of this is that while real estate loans can provide larger sums of capital, the majority also require significantly more time, administrative work and security to get. However, alternative lending options from financing providers like iwoca, can provide a valuable alternative.
While traditional real estate loans can offer high-value funding, they often come with strict criteria, long application processes, and hefty down payments. For businesses or investors who need quick access to capital or more flexibility, an iwoca Flexi-Loan can provide a simpler and faster alternative.
To find out how much you could borrow or apply today, check out our small business loans calculator.
A hard money loan is a short-term, asset-based loan typically used by real estate investors. Unlike traditional loans, hard money loans focus on the property's value rather than the borrower's creditworthiness. They are often used for property flips or rapid acquisitions when traditional financing is unavailable. The terms are shorter, usually between 6 to 24 months, and come with high interest rates (8%-15%).
To get a commercial real estate loan, you'll need to provide the lender with key financial information such as your business’s financial history, projected income from the property, and a business plan. Lenders will also assess the property’s value and the loan-to-value ratio. You can apply through traditional banks, specialist lenders, or online platforms.
Bridge loans are short-term financing options used to "bridge" the gap between purchasing a new property and securing long-term financing or selling an existing property. These loans are typically used for properties bought at auction, or for renovation purposes, and must be repaid within 6 to 36 months. They come with higher interest rates but offer fast access to capital.
Points are upfront fees paid to the lender at the time of closing, typically to reduce the interest rate on the loan. One point equals 1% of the loan amount. For example, if you’re taking out a £500,000 loan, paying one point would cost £5,000 and may reduce your interest rate by 0.25%.
Leveraging a commercial real estate loan allows investors to use borrowed capital to finance property purchases or developments, enabling them to buy more property than they could with just their own funds.
The loan is secured by the property, and the rental income generated by the property is typically used to repay the loan. By using leverage, investors can increase their potential return on investment, though it also comes with greater risk.
Commercial real estate loans typically have terms ranging from 5 to 20 years. Some loans may come with longer amortisation schedules, such as 25 or 30 years, but often include a balloon payment due at the end of the term.
The repayment schedule for real estate loans varies by loan type. For commercial real estate loans, payments are usually made monthly over a term of 5 to 20 years. In some cases, a large balloon payment is due at the end of the loan term. For short-term loans like bridge loans, repayment is typically required within 6 months to 3 years.
Commercial real estate loans are structured with either fixed or variable interest rates, and can have terms ranging from 5 to 20 years. In some cases, a balloon payment is due at the end of the term. The loan is secured by the property being financed, and lenders assess factors like loan-to-value ratio and debt-service coverage ratio (DSCR) when approving the loan.
