Bridging loans and development finance are fast and efficient ways of obtaining funding for property purchase and development. Many people often use these terms interchangeably. And, while they do have significant overlap, there are some fundamental differences. If you’re looking to acquire funding, it’s crucial you have a sound understanding of how both loans work. This article will provide an overview of each financing option and the key differences between them in order to help you make a smart and informed decision.
What is a bridging loan?
In short, a bridging loan is a short-term loan (less than 12 months typically) that is used by individuals and businesses until future funding becomes available. A bridging loan aims to provide the borrower with an injection of cash when they need it most, and these can be arranged direct with the lender or by using a specialist bridging loan and development finance broker.
Specifically, bridging loans can be used to fund a number of property transactions in the UK, including the purchase of residential and commercial property, and the purchase of a property at auction. They can also be used to fund other projects where mortgages aren’t typically available such as renovation and development projects.
Bridging loans are either opened or closed. If a bridging loan is closed, it means that there is a set date for repayment. This will typically be used if the loan is needed to cover a borrow until the sale of their property has been completed. The loan will be repaid on the completion date. An open bridging loan means that no definitive date has been set although there will typically be a long-term cut-off point by which time the loan must be repaid.
Why are bridging loans helpful?
Bridging loans provide tremendous value to both private home buyers and property investment and development companies. Since the credit crunch, high street lenders have become increasingly strict when it comes to providing mortgages. For many buyers or developers, obtaining a mortgage is no longer an option. Bridging loans, however, are much more accessible, allowing borrowers access to finance they wouldn’t otherwise of had.
Bridging loans are also much quicker to obtain. While it can take up to six months for mortgages to be approved by banks, bridging loans can be approved in a fraction of the time. In the fast-moving property market, this can make all the difference when it comes to securing a great deal on a new property.
What is development finance?
Development finance is sought for large scale projects where mortgage funding isn’t available and bridging loans are insufficient or unsuitable. Unlike bridging loans, development finance isn’t used to “bridge the gap” until a more permanent form of funding is found. Development finance will often be the only finance sought by property developers.
Typically, development finance is a larger and more significant form of funding. While it can start from as little as £200,000, it will usually run into the millions of pounds. As a result, it will only be sought by developers looking to complete large-scale, ground-up development projects or heavy renovation work.
It also won’t cover the complete costs of a project. Development finance will provide capital for the majority of the project – usually up to around 70%. The developer’s contribution will usually be used up front to purchase the land, with the development loan financing the vast majority of build costs.
Like bridging loans, development finance is a short-term loan. Terms range from six to 18 months and arranged on an interest-only basis. Repayment will typically be made at the end of the build once development has been completed and the new properties sold or let.
Why is development finance helpful?
Large-scale developments and refurbishments are typically costly ventures. A development loan is an excellent way for developers to leverage easily accessible finance to quicken groundbreaking and diversify their risk.
Because a development loan covers a large proportion of the build costs, the developer doesn’t have to front such a large amount of money. Not only does this make it quicker and easier for construction to start, it also frees up any spare capital for the developer to use on other projects or to save in order to cover unexpected expenses. As a result, a development finance loan is an excellent way for developers to manage the costs of their project better and protect their own finances.