Bridging loans and development finance are both financial terms that offer a solution to someone, to help them out financially.
The main difference between a bridging loan and development finance is that bridging loans are more flexible and typically faster to obtain than development finance. And development finance is suited for development and refurbishment projects only and are more stringent and take longer to obtain.
What Is A Bridging Loan?
A bridging loan is a short-term solution, that gives you a loan from 2 weeks up to 18 months, although they are usually paid back within 12 months.
They are available through a lender, who will assess you to determine how much you would be able to borrow.
When going to a lender for a bridging loan, security and an exit strategy plan needs to be in place.
Depending on how much equity you have in assets to use as security, what the money is going to be used and how much you’re borrowing, will depend on how much the lender is willing to let you borrow.
On top of taking a loan out, additional fees are added on top of this as well as interest rates. The interest is paid monthly, rather than yearly and the rates range from 0.40% up to 1.5% monthly.
However, there is a choice to defer paying the interest until the end of the loan. Additional fees such as valuation, arrangement and legal fees will also be added onto what is owed.
A bridging loan is a great financial solution for something that is short-term.
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What Is Development Finance?
Development finance is slightly different to a bridging loan, as it can’t be used for as many things that the bridging loan can.
It is basically a loan given to you to be able to develop or refurbish properties, whether that be residential, commercial or a variety.
The minimum loan available starts at around £50,000 and maximum length of time to pay the loan back is 48 months, but lenders will often only offer 18-24 months to pay it back by.
The longer you need it for, the harder it will be to find a lender, willing to lend you the money for a long amount of time.
With development finance, you also get interest rates and the amount you will pay, depends on experience, the amount the loan is, site location and amount of loan to gross development value.
The smaller loans that start at £50,000 tend to have about 6.5% interest on them.
A loan above that amount, ranges from 4.5%-9%. This is dependent on the experience of the developer and the gross development value being below 70%.
Lenders will typically be happy to give up to 65% of the value of the property. You will also have to pay fees such as arrangement fees, broker fees, valuation fees and professional fees, similar to a bridging loan.
Gross development value that has previously been mentioned is what the projected value of the development will be, once complete.
The more GDV the property has, the more money that can be borrowed as this is seen as an investment.
Similar to a bridging loan, a lender will be used where you have to submit an application of what you paid for the property, the costs of the project, fees and the timescale of the project.
They will also carry out searches on your existing finance and also take into the account what the value of the property will be, once complete.
Different forms of paperwork may be required as well before getting approved for the finance.
One thing is development finance is that it can be distributed between the different stages of development.
So, it might be that you only want £10,000 for refurbishing a room and then at a later stage, need more of the loan to carry on with the rest of the refurbishment.
This is good because it means you can access the money as and when needed and won’t receive the large amount of money all in one, if not needed.
This is a great option for those wanting money for a property project.
What Are They Used For?
A bridging loan can be used either by an individual or a business to help them with something financially, short-term.
Some of the uses of a bridging loan include:
- Purchasing a property quickly
- Buying a property at auction
- Home improvements or renovating a property
- Repossession prevention
- Inheritance tax
- If a company are wanting to make a financial investment and still keep the business running as usual.
- If stock and equipment is needed for a business.
- For a business, if a customer hasn’t paid a big invoice or a big sale has been lost, the money can help them out short-term to keep running.
With development finance, this mainly focuses on building and development projects,
whereas bridging loans can be used for a lot of different things. If you’re developing or refurbishing a property, whether it’s commercial or residential, then you can apply for development finance.
It targets this type of industry as it is for development purposes, to help you with developing a property or adding more value to it.
What Is The Difference Between Them?
Although they can both be used for similar purposes, one offers more of a variety than the other and may even be easier to get.
With a bridging loan, you can use this to help you financially “build a bridge” and this can be applied to many different situations.
From buying a property or making home improvements to inheritance tax and using it to help a business out financially.
There are a lot more ways a bridging loan can be used. Along with the fact they have a wider variety of use, they can be easier to get.
With development finance, this is used for more development and property uses and nothing else.
If you’re looking for some help financially whether it’s developing a property or renovating one, this is the perfect choice for you.
It’s a great way for people who need some extra money to help kick start or finish off a property project, to achieve it.
Below is the list of some of the difference:
- Bridging loans are faster to obtain
- Bridging loans are more flexible
- Development finance takes longer and is more stringent
- Development finance is only for development and refurbishment projects
- Bridging loans carry a monthly interest rate
- Development finance is calculated yearly
- Development finance funds are released in stages of the development
How Do I Apply For Them?
The application for them both is similar:
- Firstly, work out how much you would need to borrow and if it’s something you would be able to pay back within a year to 18 months.
- Make sure you have all paperwork, equity and plans ready to show the lender as evidence.
- Find a lender and send an application through to them.
- An evaluation and conversation will be carried out with the lender to discuss your needs and plans for the money.
- Some assessments and checks may be carried out.
- An agreement with the lender will be made as to how much will be borrowed and when it will be paid back by.
- The money should then be received to start using towards whatever it is you’re needing it for.
Property Finance Partners is an experienced property finance lender based in the UK. We have the experience to raise from small amounts to millions of pounds for larger projects.
For more information call us on 020 3393 9277 or Email: [email protected]