Development Loan
16 May

Development Loan or Bridging Finance: Which is Right for Your Property Development Project?

When you’re planning a property development project, you’ll probably need to borrow money from somewhere to cover the costs of construction, marketing, or buying raw materials. While you can use your own savings or personal loans from friends and family, it might be better to get a development loan from an institution that specializes in these sorts of deals. 

But what exactly is the difference between a development loan and bridging finance? Which one should you choose for your project? In this article, we’ll look at the main differences between these two financial products and help you find the right one for your needs.

The Difference Between Bridging Loans and Development Loans

There are two main types of finance that can be used in property development: bridging loans and development loans. However, although bridging loans and development loans may seem similar, they have significant differences. 

Although each type of loan can be used to fund a property development project, it’s important to understand what your options are and how best to use them in order to get your project off on the right foot. 

Here we explain these different kinds of property development loans and look at some key differences between them. We also look at when you might want to consider one over another, so you can make an informed decision about which kind of property development loan will work best for you. 

If you’re considering using either a bridging loan or development loan to fund your property development project, experts at Finance Hub can help. Their team has extensive experience working with both banks and alternative lenders, helping them tailor their services specifically to meet clients’ needs. 

Contact them today for more information about using property development loans for your next property venture!

When Should You Choose a Bridging Loan Over a Development Loan?

A development loan has a set time frame but allows you to draw money as you need it, which can be very helpful in getting your project off to a strong start. However, if your cash flow gets tight and you’re not able to meet all of your payments, you may lose some of your equity. 

This is why many developers choose to get a bridging loan instead—you pay interest only on what you borrow, meaning that your equity stays intact. There are downsides to both types of loans; discuss them with your lender before deciding which one works best for you.

As previously mentioned, a development loan requires monthly repayments. These are based on how much you borrow, how long it will take to repay, and an agreed-upon interest rate (which is typically higher than other types of mortgages). Since there’s no way to know exactly how much you’ll end up borrowing, these loans rely heavily on estimates. 

The final amount you pay will depend on your project’s actual costs—if they come in under budget, then you won’t have to pay as much back. If they exceed your expectations, however, then your payments could increase dramatically. 

Bridging loans don’t require any repayments until after construction has been completed; at that point, all outstanding debts must be paid off within six months. This means you won’t have to worry about making monthly payments while your project is still in progress—but it also means you need to pay back a lump sum when it comes time to finish your project. 

The good news is that these loans are usually offered at a lower interest rate than development loans, which can help offset some of your other costs and keep you from taking on too much debt. The final decision on whether to get a bridging loan or development loan will depend largely on your personal situation. 

If you’re not able to make regular payments over an extended period of time, then you may want to consider getting a bridging loan instead. However, if you have cash flow issues and aren’t sure how long they might last, then getting a development loan could be more beneficial in the long run.

The Pros and Cons of Both Options

If you’re looking to kickstart a property development project, consider whether your options are bridging finance or a development loan. Bridging finance and development loans both help fund property developments. However, they’re used in different ways and work in slightly different ways. Learn more about how they compare below so you can determine which might be right for your project. 

Whether you want to renovate a home into new apartments or build from scratch on an empty lot, you’ll likely need outside funding. When that financing is essential for any number of reasons—from paying contractors to purchasing materials—developers have two main options available: bridging finance and development loans. 

While each option has its pros and cons, these aren’t always easy to tell apart when simply considered at face value. However, it’s important to understand how they work so you can make an informed decision about which might be right for your project. 

Bridging finance helps developers pay for costs associated with property developments until construction starts and monthly rent begins coming in. The funds are then repaid after rent begins coming in through a repayment schedule set up during loan negotiations. 

As such, bridging finance is typically used as short-term financing rather than long-term financing. On the other hand, development loans are longer-term loans that generally last between five to 10 years. They’re also often secured by property assets instead of cash flow like bridging finance loans.

Conclusion

We’ve discussed what both development loans and bridging finance are, how much they will cost you, and how each of them differs from the other. Now that you know what your options are and what kind of projects they’re suited to, it’s up to you to decide which solution is right for your needs. Will it be a development loan or bridging finance? The choice is yours!