Real estate loans: choosing the right property finance

Real estate is a big investment, which is why businesses and investors looking to purchase, develop or refinance properties turn to finance providers. Whether you're a property developer, an investor or a small business owner, real estate loans can help you meet your project funding needs. 

In this article, we explore what real estate finance options are available, how they work and what you need to know before choosing a suitable solution.

What are real estate loans, and how do they work?

Real estate loans are property finance solutions that enable investors, developers and business owners to complete land and property purchases and cover associated costs involved before and after the transaction. They help you spread the cost of acquiring real estate, plug gaps in funding and manage cash flow during the various stages of property development projects.

Most real estate finance solutions are secured loans, where the property being purchased or developed is the asset used as collateral. Real estate loan terms, interest rates, and approval processes vary greatly depending on the type of loan and the provider. In some cases, you’ll receive a lump sum up front and repay the loan (plus interest) over a period of monthly instalments, while in short-term real estate loans, like bridge loans, you’ll repay the loan once a property sale has been completed or you secure a longer-term finance agreement. 

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.

Exploring the different types of real estate loans and finance solutions

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 multiple options for financing. 

Below, we’ve outlined the most common types of real estate loans and finance solutions for you to consider:

1. Commercial real estate loans (CRE)

These loans are used to acquire or refinance properties that generate income, such as office buildings, retail spaces, warehouses or hotels​​. 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​.

2. Residential development loans

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 a residential development loan to finance construction to sell the units once built.

3. Buy-to-let mortgages

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 property’s rental income potential. Interest rates vary based on the amount of equity involved​.

4. Bridge loans

Bridging finance is a short-term loan used to 'bridge' the gap when immediate funding is needed, often in real estate transactions​. Bridge loans are short-term loans, often used for a period of 6 months to 3 years. They're designed for speed, such as when purchasing a property at auction or for making a quick acquisition​.

5. Buy-to-let mortgages

Development finance or property development loans are specialised loans for funding property construction or significant refurbishments​​ to a building. For these solutions, 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​.

6. Mezzanine finance

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’re typically used to cover gaps in funding​, such as when developers need additional capital to complete a project.

What banks and lenders provide real estate loans?

Residential and commercial real estate loans are typically provided by property finance specialists, private lenders and challenger banks. However, some high street banks, like Lloyds, can offer specific loans for real estate.

Popular real estate loan providers include:

• LendInvest
• Shawbrook
• Octopus Capital
• Paragon Bank
• United Trust Bank

Here is a handy comparison table showing the key features and offerings from these UK release estate loan providers:

What factors do real estate loan providers consider when assessing applicants?

Lenders typically focus on the following factors when assessing real estate loan applications and deciding on terms to offer:

• Borrower’s creditworthiness
• Property type and location
• The loan-to-value (LTV) ratio
• Debt-service coverage ratio (DSCR)
• Borrower’s income and affordability
• Market conditions

How to choose the right real estate loan and finance solution

With various types of real estate finance available and numerous UK lenders offering different solutions, it can be hard to know which is right for you. Therefore, it’s crucial to define your needs and financial position and weigh up the pros and cons of different lending solutions and models to support your selection process and decision-making.

Consider the following questions before comparing real estate loan providers:

• What are my specific funding requirements?
• How much do I need to borrow, and for how long?
• How quickly do I need the funds?
• What level of flexibility do I want/need?
• What is my exit strategy and preferred repayment model?
• Do I need a specialist lender or a broader finance provider?
• Do I need guidance from a broker, or do I have the time and know-how myself?

Alternative financing solutions for commercial real estate projects 

While traditional real estate loans can offer high-value funding, they often come with strict criteria, long application processes and, in many cases, hefty down payments. Various alternatives offer fast access to funds with greater flexibility. 

Here are some of the alternatives to real estate loans to consider for your property finance needs:

• Equity finance: Investment from private equity investors, venture capitalists, angel investors or crowdfunding is a way to get significant sums of capital in exchange for equity and control in your business. 
• Loans from family or personal connections: Borrowing money from within your personal network can be a fast and flexible route for funding your property finance needs, but it relies on trusted relationships.
• Peer-to-peer (P2P) lending: Using a P2P lending platform, particularly property-related ones like LandlordInvest, can match suitable investors/lenders with your funding needs, to negotiate agreements without the need for intermediaries.
• Flexible business loans: Unsecured flexible loans from alternative and digital lenders, like iwoca, can offer fast access to funds, with simple online applications, tailored repayment terms and no capital required.  

Flexible funding solutions from iwoca to meet your real estate finance needs

For businesses or investors who need quick access to capital or greater flexibility, iwoca Flexi-Loans are a great alternative to commercial real estate finance solutions, many of which have additional fees, elongated application processes and the requirement to use assets as collateral.

Benefits of our Flexi-Loan solutions include:

• Quick funding decisions: You can expect funding decisions within 24 hours and access to funds on the same day, making it a great option for businesses needing fast access to funds for real estate investments or development projects.
• Flexible terms and criteria: Unlike traditional real estate loans, which often require extensive documentation and a strong track record, iwoca focuses on your overall performance and profitability, tailoring terms to your needs and cash flow. Also, you can use the loan like a line of credit, drawing down funds when needed and only paying interest on what you use.
• Large-scale, shorter-term capital: You can borrow up to £1 million for a few days or weeks or as much as 60 months​, meaning you have a flexible funding option for short-term needs, such as bridging a deposit for a real estate transaction or longer periods to cover unexpected or ongoing costs during a property renovation, easing cash flow concerns.
• Transparency and control: We present all rates and fees clearly upfront and make it easy to understand, track repayment plans and access additional funds, if needed (subject to approval).

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Find out how to apply for an iwoca business loan and check out our loan calculator to see your likely repayments.

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Real estate loan FAQs

What is a hard money loan for real estate?

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%)​.

How do you get commercial real estate loans?

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​.

What are bridge loans in real estate?

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​​.

What are ‘points’ in real estate loans?

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%​.

How do you leverage commercial real estate loans for new investment projects?

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 potential return on investment, though it also comes with greater risk​.

How long are commercial real estate loans?

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​.

When must real estate loans be paid back?

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​​.

How are commercial real estate loans structured?

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 the loan-to-value ratio and the debt-service coverage ratio (DSCR) when approving the loan​.