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The differences and similarities of bridging finance and development loans

Due to the credit crunch many lenders have tightened their lending underwriting which made it more difficult for people to get finance. This has particularly affected people attempting to obtain mortgages as a favorable credit history is once again a necessity and bigger deposits are needed.

The tight lending demands which are impacting many financiers have resulted in people failing to get the loans that they require. Some people have investigated other options for raising finance rather than putting an end to their plans. On many occasions bridging loan deals have been another option, though it has to be said not always a wise option.

It is very important to remember that bridging loans are just meant as a temporary loan facility so needs to be paid back in 6 to 12 months. A bridging loan can be the most cost effective choice for raising finance over a short period of time, however they usually have a high month-to-month interest charge leading them to be uneconomical if used as a long term loan facility.

The additional merits of bridging loans are that they may be arranged quickly due to the more versatile underwriting criteria. It is this benefit that means they are commonly used as a method of finance when requests through alternative sources have failed! Together with being useful when funds are required in a hurry, bridging lenders will utilize a large variety of property as security. This includes derelict property, land and buildings needing restoration. Due to the flexibleness in lending on property requiring work or significant repairs, bridging finance deals are often used as an easy way to fund building work.

Having said that there are other financial options than bridging finance which can be used for building projects. With many similarities development finance deals are also a good option for paying for building, refurbishment and construction works. The primary advantages that development finance deals have over bridging is that they can be put in place with much longer terms, often as much as 3 years, and the money can be released in phases as it is needed. This has got the primary advantage in that interest isn't actually being charged on money until it has been utilized once the venture begins and develops.

The lenders who provide development loans are specialists when it comes to construction work so can prove to be helpful and can structure finance facilities which will be truly beneficial to the venture.

As for bridging loans, once the development is over the property or house will be sold and the revenues used to pay back the development finance. On the other hand the finished property can be refinanced to repay the development funding and made available to the renting sector.