When looking to raise funds for your next project, you may be confused about the difference between bridging and development finance. They are both short-term loans that are secured against property or land. Usually, you repay these loans at the end of the arrangement rather than making monthly repayments. This tends to be done by selling the property or refinancing. Despite these similarities, these two finance facilities are different, as we’ll explain below.
What is bridging finance?
Bridging finance is a short-term loan to bridge the gap while your longer-term finance is finalised. It’s a flexible option that can be used either as an individual or a business. Bridging loans typically last for up to 12 months and can be used to fund residential and commercial projects. You receive the funds as one lump sum at the start of the loan term. The funds are usually released faster than those for development finance, making bridging loans popular when on a tight schedule.
When to use bridging finance
With fast access to funds, you can use bridging loan finance for all manner of projects. These include:
- Buying a new property when you haven’t sold your existing one
- Funding home improvements
- Buying a property at auction
- Raising capital for your business
- Buying stock or equipment for your business
- Covering an inheritance tax bill
What is development finance?
Development finance has more specific uses than property bridging loans. This specialist finance is only used for large property development projects. These can include property conversions, refurbishments and restoration projects but also the construction of properties from scratch. Property development finance can be used for residential or commercial purposes and is usually taken out for up to 3 years.
Rather than receiving a lump sum straight away, the funds are released to you at different stages of the project. Each completed stage is checked by a surveyor before the next instalment is released. This ensures the project schedule is on track, the costs are correctly managed and the work is completed to the right standard. It also helps you to keep on track with your budget and ensures you have adequate cash flow.
When to use development finance
With a focus on building, refurbishment and development projects, the uses for development finance include:
- Purchasing land and building a property from the ground up
- Renovation works
- Extending or repurposing a property development
- Completing a project that’s already underway
The lending criteria for bridging and development finance
Bridging finance loans are usually calculated on a loan-to-value (LTV) basis. The maximum LTV lenders tend to offer is up to 75%. Bridging finance lenders have more relaxed criteria than those offering mortgages. For example, as long as the security is adequate, they will offer you a bridging loan even if you’re a first-time developer in Pimlico, London.
Development finance is also available for first-time developers as well as experienced developers and professional builders. Loans are typically calculated based on the gross development value (GDV). This is the end value when all of the building and renovation works have been completed. Lenders will usually provide up to 100% of light and heavy refurbishment costs and up to 70% of the land or property value. If you’re an experienced developer requiring a loan for a project involving several units, development finance should be available for up to 90% of the total costs. Generally, the maximum loan you can expect is 70% of the GDV so the above-mentioned figures cannot exceed this.
Don’t worry if you’re an inexperienced developer, have an adverse credit rating or don’t have a deposit. Our mortgage and protection brokers deal with specialist lenders who can help with your application.
Secure funding for your project with bridging or development finance
Get the right finance solution for your needs when you speak with one of our expert mortgage and protection brokers. Based in Kent, London and Edinburgh, they can discuss your project details and provide you with more detailed information about bridging and development finance. Once you’ve made an informed decision about which type is best for you, our specialist brokers will negotiate for the most flexible terms and competitive fees on your behalf. To secure funds and get your project underway, simply call our development and bridging finance brokers on 01322 907 000.
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