The differences and similarities of bridging loans and development finance
Ever since the credit crunch most lenders have kept tight their finance underwriting which has made it harder for individuals to get finance. This has especially affected people attempting to obtain mortgages since a good credit history is once more necessary and larger deposits are needed.
The tight lending limits that are impacting many financiers have lead to people failing to obtain the loans that they need. Some individuals have investigated other options for raising finance instead of putting an end to their plans. On many occasions bridging loan deals have been an alternate option, though it has to be stated not necessarily a smart choice.
It's very important that you understand that bridging loan deals are just meant as a short term loan facility so because of this has to be repaid in 6 to 12 months. Bridging loans can be the lowest priced choice for raising finance over a short period of time, however they generally have a high month-to-month interest rate causing them to be uneconomic if used as a longer term loan facility.
The additional features of bridging loans are that they can be put in place promptly on account of the more versatile underwriting requirements. It is this advantage that means they are commonly used as a method of finance when approaches through alternative channels have failed! In addition to being invaluable when money is needed quickly, bridging lenders will use a large range of property as security. This includes derelict property, land and buildings in need of renovation. Due to the flexibleness in lending on property needing work or significant repairs, bridging loans in many cases are used as a method to finance building projects.
Even so there are other financial sources than bridging loans that could be taken advantage of for building projects. With many similarities development loan deals can also be a useful choice for resourcing building, renovation and construction works. The key advantages that a development loan will have over bridging is that they can be organized with longer terms, often up to 3 years, and the money can be released gradually when it is required. This has the principle advantage in that interest is not being incurred on money until it is used once the project begins and develops.
The firms who offer development finance are experts with regards to building projects so can be very helpful and can arrange finance facilities which will be genuinely beneficial to the venture.
In terms of bridging finance, once the development is over the house or property will be sold and the proceeds used to repay the development funding. On the other hand the completed property can be refinanced to repay the development loan and offered to the renting market.