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The differences and similarities of bridging finance and development finance

Since the credit crunch many loan providers have kept tight their lending underwriting which made it more difficult for individuals to get finance. This has especially affected people trying to obtain mortgages as a favorable credit history is once again essential and larger deposits are needed.

The tighter lending demands which are impacting many financiers have resulted in people failing to get the finance that they require. Some people have checked out other options for raising finance instead of putting an end to their plans. On many occasions bridging loan deals have been another option, though it has to be stated not necessarily a wise option.

It's very important to remember that bridging loan deals are just meant as a temporary loan facility so therefore needs to be repaid within 6 to 12 months. Bridging loans can be the most cost effective option for raising finance over a short time period, but they usually have a high monthly interest rate leading them to uneconomical if used as a longer term loan option.

Some other pluses of bridging loans are that they can be arranged swiftly as a result of the more flexible underwriting requirements. It is this plus point that means they are well liked as a method of finance once applications through other channels have failed! Together with being useful when finances are needed quickly, bridging lenders will make use of a large variety of property as security. For example derelict property, land and buildings in need of renovation. Because of the flexibleness in lending on property needing work or significant repairs, bridging finance deals are commonly used as an easy way to fund building work.

Nevertheless there are other finance possibilities than bridging loans that could be used for building work. With many parallels development loans may also be a good solution for resourcing building, redevelopment and construction work. The important advantages that development finance deals have over bridging is they can be set in place with more lengthy terms, frequently as much as 3 years, and the money can be released in phases when it is required. This has got the main advantage in that interest is not being incurred on money until it is used as the project starts and grows.

Lenders who offer development loans are specialists with regards to construction projects so can prove to be helpful and can arrange finance facilities which will be genuinely useful to the venture.

In terms of bridging loans, once the development is over the property will be sold and the proceeds used to pay back the development funding. Alternatively the completed property can be refinanced to pay back the development loan and made available to the renting sector.