If you’ve got a property development project and are considering development financing, you may have considered whether you need a bridging loan or a professional development loan to finance your project.
Here at Hunter Finance, we offer both types of financing so we are here to explain the difference between the two options to help you decide which type of loan might be right for you.
What is a bridging loan?
A bridging loan for property development is a short-term loan designed to “bridge” the gap between buying a property and securing a long-term financing solution. Bridging loans can also be used to finance refurbishment or development projects. Check out our guide to bridging loans for more detail.
What are bridging loans used for?
Bridging loans are generally quite a lot more flexible that development loans, in that they can be used for a number of things such as:
- Buying a property at auction
- Buying a property or land quickly
- Property refurbishments and developments
- Repossession prevention
Bridging loans are available with some lenders and banks for a variety of other business and personal finances too.
What is residential development finance used for?
Residential development finance is a bit less flexible than a bridging loan and is generally only used for property development or refurbishments. Development financing is an ideal option to secure the purchase of a property or finance the construction costs.
For a property developer looking for a new build developer loan, this can be a great option as it’s often available over a period of 12 months and funds can be released in stages throughout the project, as and when needed. This can help to manage finances and keep costs down, rather than accepting one large lump sum right at the beginning.
What are the similarities between a bridging loan and development finance?
- They are both short-term financing options.
- They are secured against collateral such as property or land.
- They often have no monthly repayments.
- They are usually repaid at the end, through the sale or refinance of the collateral property.
- A solid exit strategy – both financing options need a robust exit and repayment plan.
What are the main differences between a bridging loan and residential development finance?
Faster payouts
Bridging loans can be paid out faster, sometimes within a few days. Development loans may take 10 or so working days. This makes bridging loans great for securing properties at auction.
Flexibility
Bridging loans are more flexible and can be used for a variety of different financing needs. Development financing tends to only be used for new builds or property redevelopment projects.
Staged payouts
Bridging loans tend to be paid out as one big lump sum at the beginning. Development finance may have a more staged approach inline with the renovations and constructions plans, and funds may only be released at agreed stages when they are needed. This can help to keep the loan amount flexible, according to the needs of the project.
What other property development financing options are available?
We have discussed the key differences between the two most popular types of development finance; bridging loans and residential development financing. But what other options are there to finance a residential property project?
Hunter Finance also offers equity financing. Equity Finance is another form of financing whereby the lender provides a loan in return for an equity in the property. This allows the lender to earn a share of the profit at the end of the project instead of charging interest payments for the duration of the loan.
There is greater risk for the lender as the project needs to make a certain profit in order for them to get a return on their investment. Therefore this form of property development funding is usually reserved for the more experienced developers with a proven track record of experience and profitable projects. For more info, read our guide to equity financing.
Apply for property development finance
If you have a potential project in the South East of England then get in touch or apply in principle online for finance with Hunter Finance Ltd. We consider applications from all types of property developer – new and experienced – so apply in principle today for a quick decision.
