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The many variations and parallels of bridging finance and development loans
Ever since the credit crunch most loan providers have tightened their loan underwriting which makes it harder for individuals to get finance. This has particularly affected people hoping to obtain mortgages because a favorable credit history is again necessary and bigger deposits are required.
The tight lending constraints that are influencing many financiers have lead to people failing to get the finance that they might need. Some people have checked out other options for raising finance instead of stopping their plans. On many occasions bridging finance deals have been another option, although it has to be stated not necessarily a smart alternative.
It is very important that you remember that bridging loan deals are only intended as a short term loan facility and therefore has to be paid back in 6 to 12 months. Bridging loans can be the most cost effective option for raising finance over a short period of time, however they usually have a high monthly interest rate causing them to be uneconomical if used as a long term loan option.
The additional merits of bridging finance are that they may be arranged promptly owing to the more versatile underwriting requirements. It is this benefit that makes them commonly used as a method of finance once applications through other sources have failed! In addition to being convenient when money is required quickly, bridging lenders will use a large range of property as security. This includes derelict property, land and buildings in need of restoration. As a result of the flexibleness in lending on property in need of work or major repairs, bridging loans are often used as a method to fund building projects.
Even so there are other financial alternatives than bridging loans which can be taken advantage of for building projects. With many similarities development finance deals also are a useful choice for resourcing building, restoration and construction projects. The key advantages that development loans have over bridging is they can be organized with more lengthy terms, frequently up to 3 years, and the money can be released in phases when it is needed. This has the main advantage in that interest isn't actually being incurred on money until it is being used once the venture begins and grows.
Lenders who provide development finance are specialists when it comes to construction projects so can be very helpful and can arrange finance facilities which will be truly helpful to the venture.
Concerning bridging finance, once the development has been completed the property will be sold and the proceeds used to repay the development finance. Alternatively the completed property can be refinanced to settle the development financing and offered to the rental market.
