Differences and similarities of a bridging loan and development finance
Ever since the market meltdown many financial institutions have kept tight their loan underwriting which makes it more tricky for individuals to get finance. This has specifically affected people attempting to obtain mortgages since a favorable credit history is once again a must have and larger deposits are needed.
The tighter lending constraints which are impacting many financiers have resulted in people failing to obtain the loans that they need. Some people have investigated other options for raising finance rather than stopping their plans. On many occasions bridging finance deals have been another option, although it has to be said not necessarily a wise alternative.
It's very important that you realize that bridging finance options are just intended as a temporary loan facility so therefore needs to be paid back in 6 to 12 months. A bridging loan can be the most affordable choice for raising finance over a short time frame, however they usually have a high month-to-month interest rate making them uneconomical if used as a longer term loan option.
Some other positive aspects of bridging loan funding are that they may be put in place swiftly thanks to the more versatile underwriting criteria. It is this plus point that means they are commonly used as a method of finance once requests through alternative channels didn't work! On top of being valuable when funds are needed fast, bridging lenders will make use of a large variety of property as security. For example derelict property, land and buildings in need of renovation. Due to the flexibility in lending on property needing work or significant repairs, bridging loans in many cases are used as a quick way to pay for building work.
Even so there are other financial alternatives than bridging loans that may be taken advantage of for building work. With many parallels development loan deals are also a useful option for funding building, restoration and construction works. The key advantages that development loans have over bridging is that they can be arranged with longer terms, often up to three years, and the money can be released gradually when it is needed. This has the primary advantage in that interest isn't actually being charged on money until it is used as the project begins and expands.
Lenders who offer development finance are specialists concerning construction work so can be very helpful and can structure finance facilities which will be genuinely helpful to the venture.
Concerning bridging finance, as soon as the development has been completed the property will be sold and the income used to repay the development loan. Alternatively the completed property can be refinanced to settle the development loan and made available to the rental marketplace.