There tends to be a lot of discussion among potential borrowers about property development finance and bridging loans. Although both are popular forms of finance and have some similarities, they do differ from each other in their specific uses.
Bridging Loan vs Development Loan Compare For Property
Let’s take a look at the common similarities between bridging finance and development finance.
• Both are short-term funding options
• Both can be used to fund the purchase of residential and commercial properties
• Both are secured loans
• Both can be secured against property or land
• Both are often used to break traditional property chains
In this post, we will point out some key differences between both products to help you understand when is the ideal circumstance to use each product and what you can expect from each.
What is Development Finance and When is it Used?
Development finance is specifically used as a way to raise funds quickly to finance a building project or the extension of an existing building. The funds raised must be used only for property development purposes.
Development finance is, therefore, considered a suitable solution in the following circumstances.
• You are planning to undertake a major construction project
• You want to renovate an existing property
• You want to extend an existing property
• You want to cover the development cost
When it comes to development finance in London, there is no fixed upper limit with respect to how much you can borrow. Moreover, it may take some time to process the application and release the funds as the lender will take many factors into account before granting the loan.
What is Bridging Finance and When is it Used?
On the other hand, bridging loans can be used almost for any legal purpose, including property renovation or purchase. They are extensively used when the deadlines are tight. Funds through bridging finance can be raised in a matter of days, making it an ideal finance solution to cover urgent expenses.
Bridging finance is often used in the following situations.
• You want to purchase a property at an auction
• You want to expand your business or cover unforeseen expenses
• You want to renovate your property and put it on sale
• You want to buy a new home before the sale of the existing home
Technically, there is no limit to how much you can borrow through a bridging loan as far as you demonstrate an appropriate exit strategy. The lenders are willing to give any amount if they are convinced that you will be able to repay the loan on time. There is a term called ‘open bridging loan’ in bridging finance which means there is no fixed term end date. However, it is expected to be repaid within a few years at most.
Release of Funds
Another key difference between these two loans is how the funds are released. In development finance, the funds are released in instalments depending on the requirements of various stages of the process. In other words, the loan is approved against the predicted value of the completed property, but the funds are released in stages to cover the build cost throughout the development stages. One of the reasons the funds are released in instalments because the lender wants to make sure that the given loan amount is proportionate to the value of the work that is being undertaken.
With bridging finance, the funds are released all at once as soon as the application is approved. The funds are transferred into the bank account of the applicant within a few days, allowing them to complete the property purchase on time.
Loan Terms
Both development finance and bridging loans are flexible in terms of the loan term. However, bridging finance will almost be repaid sooner than development finance. The average term of bridging finance is about 6 to 18 months, whereas development finance may last for several years.
With development finance, the amount is repaid at the end of the term through the sale of the completed property or when you refinance. While in bridging finance it is highly unlikely that you will pay any upfront fees or make any interest payments during the term of the bridging loan.
In the event, that the property has not been completed or sold, the borrower can refinance with the same lender or with another lender. However, an important thing to keep in mind is the loan terms may not be as favourable to you as the first time with either type of loan.
The Amount You Can Borrow
Depending on the size of your development project, development finance enables you to borrow anywhere between £50,000 to £100 million. The development finance loan is calculated based on Gross Development Value (GDV), which refers to the total value of the loan once all the development work is finished. The funds you can raise also depend on the credit history, appropriate paperwork, experience in the industry and how well the lender is convinced about your development plan.
With bridging finance as well, you can borrow anything from a few thousand pounds to tens of millions. The amount you can borrow will be calculated on the Loan-to-Value (LTV), which ranges from 60% to 80%. However, the final loan amount depends on the borrower’s repayment capacity and the value of the security he offers.
The Rate of Interest
In development finance, you will be charged somewhere between 4.5% to 7.5%, which may go beyond 10% if the loan amount is smaller. Here, the level of property development experience will also play a significant role and the lenders are ready to grant lower rates to experienced developers. Moreover, the interest is rolled up every month, so monthly repayments are not expected in development finance.
With bridging finance in London, the interest rates are usually calculated as monthly payments, so you might be charged anywhere between 0.5% to 2% interest per month. The interest rate also depends on the security you offer, your credit history and your exit plan (when and how you will repay the loan).
Bridging loans for property development are short-term financing options specifically designed to support the development of residential properties. These loans provide the necessary finance for property development projects, including construction, refurbishment, or conversion. Bridging finance lenders, authorized and regulated by the Financial & International Business Association (FIBA), offer these loans, considering factors such as the property’s value, the borrower’s exit strategy, and the viability of the development. The loan is typically repaid once the property is sold or refinanced. Bridging finance for property development is particularly useful when there is a need for quick access to funds to capitalize on opportunities or cover costs during the development process. However, it’s important to note that lenders may require evidence of planning permission and a well-defined strategy for the property development project.
In London, bridging loans specifically tailored for property development purposes are available to support developers in their projects. These development bridging loans provide a short-term financing solution to bridge the financial gap during the property development process. Once the project reaches completion or a more permanent financing option becomes available, the loan is repaid. It’s important to note that reputable lenders offering property development bridging lender in London are authorized and regulated by the Financial & International Business Association (FIBA). This regulatory oversight ensures compliance with industry standards and offers borrowers added protection when engaging in property development ventures.
Final Words – Difference Development Finance and Bridging Finance: Choosing the Right Funding Option
If you are interested in either development finance or bridging finance, it is advisable to contact a specialist broker before deciding which way to go. An expert broker will help you compare all the funding options and put you in a much better position to choose an ideal finance solution for yourself. Click to Blog