Identifying the Differences Between Development Finance and Bridging Finance

It can be confusing trying to differentiate between certain types of funding for development of properties for investment purposes. Typically either development finance or bridging finance is the preferred option for landlords and developers. But what is the difference between these two forms of finance? Although they are relatively similar there are some intricate differences that need to be taken into account when choosing what finance vehicle is best for your project.

Lets first look at what they both offer:

• Both can be used to purchase property both commercial and residential.
• Both are secured types of finance.
• Both can be used to avoid a break in a property chain.

But lets look at the difference between bridging finance and a development finance.

When is it Best to Utilise Development Finance?

Development finance is typically used for investment properties that need to be renovated or have some major structural work needing to be done in order for it to brought up to standard.

It can be used to purchase land for building new properties intended for either resale or the rental market once the project is completed. The loan is generally used to cover all construction costs associated with the build until either sale or long term finance can be arranged.

Bridging vs Development Loan Terms

Development and bridging loan terms are actually very similar, varying from around six months to approximately 15 months. 

At the end of the loan period the interest rate is usually rolled up and the full amount of the loan is settled in one payment. This is generally once the property has either been sold or other funding, such as a mortgage, has been secured.

When is it Best to Utilise Bridging Finance?

A UK bridging loan broker, or a similar broker in your area, can speed up the process for you when applying for finance, whether you are buying a car or renovating a property. Bridging finance is particularly advantageous for securing a great deal at an auction or when renovations and/or refurbishment must be finished within a tight deadline.   

Bridging finance is also particularly useful for homeowners who are looking to move to a new home but have not yet sold their current property.

How are Funds Released to Borrowers?

If you decide that bridging finance is the best choice for your needs, then you will provided with the full amount you have borrowed upfront, which is imperative should you be trying to land a great deal at auction where payment is typically due within 28 days of the auction date.

This type of loan is also utilised for properties requiring extensions or some additional buildings that may be needed.For businesses, bridging loans can be used to raise finance to fund business growth, buy new equipment/machinery or help with cash flow issues.

How is the Amount You Can Borrow Calculated?

For bridging finance the full amount you can borrow is calculated using the LTV (loan to value). So this requires a deposit to be paid with the balance financed by the lender.

The release of funds will be subject to the surveyor signing off on work that has been done and is due to be done. This is done primarily to ensure that the value of the work is proportionate to the loan amount. This enables the developer to stick to a budget. With development finance the funds are released in periodic instalments which coincide with certain stages of the development project.

Development finance differs in that as opposed to the amount being loaned using LTV, the amount is dependent on GDV (gross development value) which is calculated once the project is complete.