Bridging Loans and Development Finance
Despite steady progress, property development is still a hassle for property developers. Most developers get confused by different loan types and can’t figure out the best one.
The real problem often arises when they can’t see the difference between bridging loans and development finance.
Property development and real estate have been the engine of the UK’s economy for decades. Recent stats show positive growth in the construction sector.
According to trading economics, the UK’s construction and development GDP was £32106 Million in the Q2 of 2022.
Today, we will show you a comparison between bridging finance and development finance. So, stay with us to find the right loan type for your development project.
What are bridging loans used for?
Bridging finance is the capital you get from specialist lenders or Peer to Peer Lending platforms. These loans often help to fund the short-term needs of the borrower.
As an individual, you might have different needs and want the money to go into the property sector for different reasons.
However, you can use bridging loans to bridge the money gap. When you don’t have the finance and want to buy a house before someone else gets in your way.
You can use bridging finance to fund your house purchase while your capital is still in the way.
The reason behind getting instant money for a house purchase is the turbulent property market in the UK.
People tend to grab the opportunity as early as possible as many houses are unavailable. This intense competing landscape makes bridging loans a suitable option to arrange finance before your old house sells.
Besides buying a property, you may need money to refurbish your home. Maybe you want to renovate the rooms or add an extra kitchen/bathroom to the property.
In that case, bridging loans can help you start your refurbishment project by securing a loan against the UK’s property.
Most property investors have a knack for buying derelict or uninhabitable estates, renovating them, and selling them at a higher value.
If that is what you like, you can go for bridging loans. Most of these properties get sold in auctions. As you know, you need instant money to win auctions and proceed with the payments.
So bridging finance arranges instant finance to win an auction. These are the main reason why people use some specialist short-term loans.
"READ MORE: COMMON MISTAKES TO AVOID WITH BRIDGING LOANS"
Why do people use development finance?
Development finance, as the name implies, refers to the money you get to finance your property development projects. We all are used to seeing tall skyscrapers and mighty estates.
Have you ever reckoned how someone put billions into the business of brick and mortar? How could someone have such huge amounts?
The answer is simple. Property developers are in the business or building and then selling or using the property for commercial purposes.
So, to put money into development, they need to get loans and ask investors to invest in their projects.
The loans they normally use here in the UK for property development projects are called development finance.
So, development finance is used to build property projects from scratch. You may use these loans to cover the development costs and get aid at different project stages.
These property development loans are mostly inclined toward strict commercial projects. However, anyone wanting to build their own house from scratch can take these loans.
The property developers repay the loans by selling the property, making them buy-to-let, or mortgaging the property.
Key Differences between Bridging Loans and Development Finance:
Both loan products seem alike, but some key areas make these loans different. Let’s find out here.
Money released:
Bridging loans have different criteria for lending than development loans. Depending on the projects and nature of loans, you get money at different stages.
Usually, a lender provides a bridging loan at the start of the project as a lump sum. So, when you want to purchase a new house, you need the total sum of money you get from a bridging loan.
On the other hand, development finance is usually given at different stages. A lender assesses your property through a surveyor and provides the initial payments at the start of the project.
Leaving behind the major chunk of money released on set milestones till the end of the project.
Loan time duration:
While both loan types provide similar loan duration, it’s subjective to the project. Mostly, bridging loans are short-term loans and don’t generally exceed more than 2 years after you have bought a property.
On the other hand, property development loans generally last for 3 years, providing the development project lasts for three years. However, both loans fall into short-term bridging loans UK and are suitable for property projects.
Interest rates difference:
However, the interest rates can reach between 0.7%-1% per month. As an aggregate, it becomes 11%-12% per annum.
On the flip side, development finance may go way beyond bridging loans. Also, the interest rate varies depending on the project duration and size.
Usually, the interest rates are higher for small projects and vice versa. Well, your interest rates can depend on your experience in property development and your credit history.
Summing up:
There can be many specialized loans in the property market. Some are purely associated with buying/selling property, while others are related to construction and development.
The loans that associate with property buying/selling and refurbishment are called bridging loans. On the other hand, those used to develop a property are called development loans.
People often confuse these loans as the same, but they are different in the nature and costs associated with them.
In this article, we have provided some key differences between bridging loans and development finance. If you have gone through it, let us know your feedback.
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