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Differences and parallels of a bridging loan and development finance
Since the market meltdown most financial institutions have tightened their finance underwriting which made it harder for people to obtain loans. This has specifically affected people looking to obtain mortgages because a favorable credit history is again an essential and much larger deposits are needed.
The tighter lending limitations that are impacting many financiers have led to people failing to obtain the finance that they require. Some people have checked out other available choices for raising finance rather than stopping their plans. On many occasions bridging finance deals have been an alternate option, although it has to be said not necessarily a wise alternative.
It's very important that you understand that bridging loans are only meant as a temporary loan facility so needs to be repaid in 6 to 12 months. Bridging loans are often the lowest priced option for raising finance over a short period of time, however they generally have a high month-to-month interest charge leading them to uneconomical if used as a long term loan facility.
The other pluses of bridging loan funding are that they may be arranged swiftly because of the more versatile underwriting requirements. It is this plus point that means they are popular as a method of finance when approaches through other sources didn't work! In addition to being valuable when money is required quickly, bridging lenders will make use of a large variety of property as security. This includes derelict property, land and buildings in need of renovation. Because of the flexibleness in lending on property requiring work or major repairs, bridging loans are commonly used as a quick way to finance building work.
However there are other financial options than bridging loans that can be taken advantage of for building projects. With many parallels development loan deals also are a good alternative for paying for building, restoration and construction work. The particular benefits that a development loan will have over bridging is that they can be set in place with longer terms, often as much as 3 years, and the money can be released in phases when it is needed. This has the primary advantage in that interest is not being charged on money until it is utilized as the project starts and develops.
The lenders who offer development finance are specialists concerning construction work so can be helpful and can arrange finance facilities which will be genuinely useful to the venture.
Concerning bridging finance, as soon as the development is over the house or property will be sold and the revenues used to pay back the development loan. Alternatively the completed property can be refinanced to repay the development loan and offered to the rental marketplace.
