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Funding your construction project: Bridging vs. development finance

7 min read

12 September 2019

What are the differences between the most commonly used finance options for property developments, bridging loans and development finance?

When it comes to starting a new development or construction project, it can be difficult to know which finance facility will be the most suitable. This guide runs through the differences between the most commonly used finance options for property developments, bridging loans and development finance.

Bridging finance

Bridging loans offer a short-term (often 12 months or less), flexible funding facility for almost all types of property transactions, including renovations and development projects. Bridging loans are often used to fill a gap in a person’s finances before longer-term funding can be arranged, or an alternative source of funds become available – so having a secure exit strategy is key.

One of the biggest benefits of bridging finance is that it can be arranged very quickly – sometimes in as little as 48 hours depending on the circumstances. So, in times when you need to source funding quickly, bridging finance can often provide an excellent solution.

What development projects can bridging finance be used for?

A bridging loan can be used for a wide variety of development and refurbishment projects. This can be from renovating your kitchen or building an extension to building multiple properties or commercial units.

Funding your construction project

Bridging lenders are happy to lend to first-time developers if the project is low risk.

It’s important to note that, for larger development projects, a bridging loan should only be used if the project can be completed within the shorter timescale that bridging offers. Going over term could result in additional fees.

What is the lending criteria for bridging finance?

The lending criteria for bridging is a lot more relaxed and flexible than for other types of finance. Bridging lenders are happy to lend to first-time developers as long as there is sufficient security and the overall project is low risk. In fact, bridging can be used to finance smaller development projects in order to build up a portfolio before moving onto larger ventures. The maximum Loan to Value (LTV) that a bridging loan allows is generally 75%.

How much does bridging finance cost?

Interest is charged as a monthly rate and can cost anywhere between 0.4% and 1.25% per month, depending on the circumstances. There are no monthly repayments required as the interest is added to the loan facility which is repaid with the capital at the end of the term. Using an online bridging loan calculator will work out what interest rate you will likely be charged. 

Other costs to consider include a facility/arrangement fee which will cost, on average, 2% of the net or gross loan amount. However, this fee may significantly reduce if you are borrowing upwards of £150,000. 

To set up a bridging loan, a valuation on the security property or land will also be required. The cost of this will vary depending on the surveyor used and the type or size of the property. There will also be legal fees, exit fees and potentially broker fees to consider too. 

Development finance

Development finance is a product specifically designed to fund development, construction and renovation projects. Development finance can be used to fund both the land purchase and building costs for ground-up developments, as well as provide a source of funding for lighter renovation or conversion projects. The maximum term available is usually three years, and using a development finance calculator will allow to see how much it would cost you. 

A lot of development finance facilities will be paid out in stages, especially where land purchase is involved. An initial sum will be released (usually up to 70% of the land’s value) to secure the site, then the rest of the funds are released in stages throughout the construction process. 

The benefit of development finance over bridging is that it can provide the largest funding facilities. 

What projects can development finance be used for? 

Development finance can be used for almost all property renovation, conversion and development projects.

Funding your construction project - Bridging vs development finance

Development finance can provide the largest funding facilities. 

What is the lending criteria for development finance?

The maximum Loan to Value for development finance is generally 70% of the Gross Development Value (GDV) of the project. However, in some circumstances, up to 80% LTV is possible. 

To development finance lenders, your experience and track record as a property developer is very important. They will want to see what type of projects you have done in the past, including how successful they were and how much profit was made.

How much does development finance cost?

Interest is added to the loan facility on a monthly basis, and can cost anywhere from 4% to 15% per annum, depending on the circumstances. The rate charged will depend on the LTV, your previous experience as a developer, the type of project and where the development site is. 

There will also be an arrangement or facility fee added to the loan. This is typically between 1% and 2% of the net or gross loan amount. For development finance, valuation fees will be a lot higher than for bridging as they will value the development site as it is, plus determine the likely costs of the building work and the length of time it will take, and finally what the development will be worth once finished. 

You will also have to pay monitoring fees. During the course of development, lenders will send out surveyors to monitor the process. These visits are very important and will need to go well as they will determine further fund releases. You’ll also have to consider solicitors fees, administration fees, and exit fees.