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Bridge loans and development loans share many similarities, however, there are differences between the two that you should familiarise yourself with if you’re considering applying for property funding.
But what is a bridging loan, and how does it differ from a development loan?
Keep reading to find out more!
What are bridging loans?
A bridging loan for development property is short-term financing used to tide property developers over as they wait for their funds to be accessible. This money may not be available, as they are often waiting on the sale of another property, land, or shares.
A bridging loan is provided by bridging loan lenders – specialist lenders who focus on property finance.
Who should get a bridging loan?
Bridging finance is ideal for developers, landlords, and householders to support them with various residential or commercial property dealings, including:
- Property development
- Property purchase at auction
- Tax payments
Ultimately, any costs that would have been paid for using the long-term finance gained through the sale of an existing property are covered by a bridge loan.
How do bridging loan brokers release funding?
To make sure landlords can acquire property before it is sold, or developers can finish their project by their expected completion date, lenders provide bridge loans upfront in one large sum, very quickly.
However, with refurbishments, the lender can release funding in phases – but this depends on the broker.
Depending on the bridging loan you take out, you will usually have to repay the loan amount before a fixed repayment date, or over a flexible period – however, the latter can often lead to higher interest rates.
What’s a development loan?
As the name suggests, development loans are specifically for property development, unlike bridging loans, which tend to cover a few things.
For example, a development loan can help landlords and property developers afford the materials and labourers needed to complete a ground-up development – a building project started from scratch.
They’re similar to bridging loans in the sense that they’re short-term loans offered by a broker, but they take a little longer to gain and are less flexible in terms of what they can be used for.
How does development loan funding work?
After a landlord or developer has been accepted for a development loan, lenders tend to release development loan funds in instalments to ensure the work being completed is proportional to the money borrowed.
This is incredibly beneficial to developers, as it encourages them to stay within their budget and ensure all aspects of the project are completed without overspending in certain areas.
Only when the project is finished will developers have to pay back their loan, which differs from the monthly interest payments associated with traditional loans.
To summarise, both bridging loans and development loans are for those funding a property venture. However, bridging loans are more flexible in that they can be used to buy property between selling properties, rather than just property development.
