Development finance and bridging loans are often confused, but they’re used for very different situations. Choosing the right one from the start can help your project run more smoothly and avoid unnecessary delays or costs.
These are specialist lending products, and not every lender provides them. With access to a wide range of specialist lenders, I can help you understand your options and find the most suitable finance for your project.
What is Development Finance?
Development finance is a short-term loan designed to fund property projects that are being built, converted or extensively renovated for sale or rent. This could include building new homes, converting commercial buildings into residential properties, or refurbishing existing properties to increase their value before selling or letting them
Unlike a standard mortgage, development finance is designed around the project itself. Lenders will carefully assess the development plans, build costs, your experience, the expected value once the project is complete and the overall viability of the project before agreeing to lend.
One key aspect to note is that development finance is different from a self-build mortgage. A self-build mortgage is a mortgage type offered by lenders for individuals who wish to build a new property that will serve as their main residence when complete. Self-build mortgages are financed similarly to standard residential mortgages but will require additional evidence for the lender, such as project plans, planning permissions, and building and staging costs.
What is a Bridging Loan?
A bridging loan is a short-term loan designed to “bridge the gap” until a longer-term source of funding becomes available or a property is sold. Bridging loans can often be arranged more quickly than standard mortgages and are commonly used when speed is important, such as purchasing a property before selling your current home, buying a property at auction, or securing a property that isn’t currently suitable for a standard mortgage.
Bridging finance is usually much shorter than a traditional mortgage, often lasting between a few months and up to a year or two, depending on the lender and your circumstances. Lenders will expect a satisfactory “exit plan” for paying off the bridging loan, such as the sale of the property after a renovation or replacement by a standard mortgage.
For example, someone purchasing a Buy-to-Let property at auction may use a bridging loan to complete within the auction timescales. Once any required property work has been completed, the bridging loan can then be replaced with a standard Buy-to-Let mortgage.
How Does Financing Work?
Development and bridging finance work very differently from a standard residential mortgage. Both products are generally more expensive than a standard mortgage, with higher interest rates and fees. They’re designed for short-term borrowing where speed or the nature of the project means a standard mortgage isn’t suitable.
With development finance, funds are normally released by the lender in stages as construction milestones are completed. This means you’re only borrowing what you need as the project progresses, helping to manage costs throughout the build. Development finance is typically repaid when the completed development is sold or refinanced onto a commercial or investment mortgage.
Bridging loans are released in one lump sum and are usually repaid when your planned exit strategy is completed. This might be selling the property, refinancing onto a standard mortgage, or using funds from another source.
For both products, lenders will always want to understand your exit strategy before agreeing to lend.
Who Are These Products For?
- Property developers building homes for sale.
- Investors developing or converting properties to let.
- Landlords carrying out major refurbishments or conversions.
- Buyers purchasing properties at auction.
- Investors buying properties that aren’t currently mortgageable.
- Experienced property investors looking to move quickly when opportunities arise.
Ready for Next Steps?
If you are considering development finance or a bridging loan, I’ll help you understand your options and find a lender that’s the right fit for your property and investment goals.
If you’re ready to get started, let’s have a Quick Chat for an initial conversation or message me on Whatsapp. If you’re actively searching for a property and would like to discuss your detailed mortgage requirements, book a longer Specialty Appointment and we’ll go through your situation together.