Bridging Loans & Development Finance

Property development is a highly profitable investment, but many property developers need more funds, and the whole process is still a hassle. The most common funding sources that property developers are using include bridging loans and development finance from high street lenders. If you are looking for funds to purchase a property, it is essential to understand the difference between bridging loans and development finance.

You can easily find bridging loan companies and p2p lending platforms offering loans for property development. On the other hand, high street lenders are also offering loan development finance. So, you may need clarification about which one is the best option to complete a development project. 

People get confused between these funding sources because of similarities, such as they are both short-term products secured against properties with no monthly repayments. 

Today, we will describe a comparison between bridging financing and development finance so that you can choose the right option according to your needs. 

When Is A Bridging Loan Used?  

A bridging loan is a type of short-term financing usually available through specialised bridging lenders and p2p lending platforms. These are usually used to fulfil the short-term financial needs of borrowers. 

Borrowers' needs may differ depending on their circumstances, so bridging lenders offer much flexibility in terms of use. You can use it for several purposes.   

The most common use of a bridging loan is to bridge the gap when you want to purchase a property before the sale of the existing property. You can take out bridging debt when you are waiting for long-term funds to become available. 

Auctions are a great opportunity to buy a property below its market value and people tend to grab such opportunities. Bridging finance helps you buy a property at auction by providing quick access to funds. 

Besides purchasing a property you can use bridge loans to renovate or refurbish a property before sale to increase its market value. Whether you want to change windows or doors design or add a new kitchen, bridging lenders provide you with the required money. These are some common reasons to use bridging finance. 

When Is Development Finance Used?  

Development finance is not flexible and can only be used to fund development projects. These projects usually include building a property from scratch. 

If you have ever had an experience with property development, you have an idea how costly it is, and you need a large amount of money to purchase materials from bricks to doors and windows. You can get such findings during different stages of development. 

You can repay the loan by selling the property, taking a long-term mortgage or renting out a property and then using this rent to make repayments. 

Difference Between Bridging And Development Finance

As we described above, best bridging finance and development finance have similarities that confuse people, but they differ in several ways. Here we are describing the differences in twitter understanding: 

Release Of Funds       

Bridging lenders usually release funds in two different ways. You may get quick access to funding within a short time and get all funds at once. This approach is used when borrowers need funds to purchase a property. 

However, bridging lenders provide funds in stages when you need funds for heavy refurbishment or development projects. 

  

On the other hand, lenders offering development finance usually release funds in stages. You need to get a lump sum amount. First, the lender assesses your property and provides initial payment at the start of the project, and the remaining funds are released in stages throughout the build. 

Development finance lenders release funds depending on the work completed, while bridging lenders release funds depending on the value added to the property since the last stage release. 

Loan Terms

Although both loan types have similar loan terms, loan terms usually depend on the type of project. Bridging loans are a short-term funding option and typically last for not more than 2 years.   

However, development loans can have a longer duration than bridging loans, and it usually lasts for 3 years. 

Both loans are suitable for property development projects; you can take them out according to your financial circumstances and type of project. 

Interest Rate

It is a notion in the property market that bridging loans are expensive because of the high-interest rate. The interest of bridging finance usually ranges between 0.43%-0.65% per month, which means it is 5.16%-7.8% per annum. 

 

On the other hand, the interest rate of development finance may go beyond the bridging loan. The interest rate depends on the size and duration of the project. 

  

The interest rate is higher for small projects and borrowers with high levels of risk. Your interest rate also varies depending on your credit score and experience in property development. 

How To Calculate Maximum Loan For Each Product?   

A bridging loan is calculated on the basis of the loan to the value of the property. When you take funds to refurbish or develop a property, lenders take into account the gross development value GDV. 

In contrast, property development finance lenders consider three factors to calculate the maximum loan. First is the loan to value the product, second is GDV, and third is a loan to cost (LTC). LTC describes the amount of loan available as a percentage of the total development project cost.    

Conclusion    

Development finance is different from bridging financing as it can not be used for as many purposes as bridging loans. Development finance is a loan given to you to develop or renovate a property, while a bridging loan can be used for almost any legal purpose, from purchasing a property to paying tax bills. Both are types of short-term funding and come with high-interest rates, so you must keep it in mind before taking out a loan. Because if you fail to repay on time, your lender may repossess your property. Most bridging lenders have bridging loan calculators on their websites that you can use to find out the expected interest rate on the loan amount you want to take out. This way, you can get an idea of whether you can afford to repay or not.