Pros and Cons of Bridging Finance for Property Development & Construction
Bespoke funding solutions are available to suit all types of property development projects. For more ambitious builds and developments, specialist development finance is typically the preferred option.
A strictly short-term facility, development finance can be issued in any required sum (with no upper limits) at a competitive monthly rate of interest. The funds are released in a series of stages as the project progresses, rather than as a lump sum at the time the facility is authorised.
Elsewhere, bridging finance is becoming an increasingly popular choice among property developers. But what are the specific benefits of bridging finance compared to the alternative options available?
Can Bridging Loans Be Used for Property Development?
A bridging loan can be used for any legal purpose, which includes property development and construction projects. Again, a bridging loan is a strictly short-term facility, which attaches a competitive monthly interest rate which can be ‘rolled up’ to maximise cash flow.
The biggest difference between a bridging loan and development finance is the way in which the funds are issued. With a bridging loan, the full loan amount is transferred to the borrower as soon as the loan is authorised. The funds are not issued on the basis of the completion of specific project stages – the borrower gains full access to the facility from day one.
Like a development finance loan, bridging loans can be taken out with no specific limitations on how much can be borrowed; there are differences between the two facilities to take into account when deciding which is the better choice for a property development project.
What Are the Pros and or Cons of Using a Bridging Loan for Property Development?
All property development loans have their unique pros and cons, including bridging finance.
Key benefits of bridging loans as a property development funding solution include the following:
- A bridging loan can be comparatively quick and easy to arrange
- The funds required can often be accessed within a matter of days
- All interest and borrowing costs are ‘rolled up’ into the final payment, so no monthly instalments need to be paid during the term of the loan
- Bridging finance can be used for any legal purpose whatsoever
- A bridging loan can be secured against almost any type of property, irrespective of its condition
- The full loan amount is made available right away, rather than being issued in stages
- Bridging loans may be suitable for smaller property development projects, with loans available starting from £50,000 or less
- A promptly repaid bridging loan can be a uniquely cost-effective facility for a wide variety of purposes
- There are typically no exit fees applicable on a bridging loan, which almost always apply with development finance
As for the downsides, the main disadvantages associated with bridging finance for property development are as follows:
- Interest rates may be higher than those of a comparable development finance product
- A bridging loan can only be taken out where eligible security (assets) can be provided by the applicant
- Bridging loans that overrun the agreed initial term can become expensive
- It is often not possible to borrow as much with a bridging loan as with a bespoke development finance loan
Importantly, specialist development finance is usually only available to experienced property developers with an established track record. By contrast, a bridging loan can be taken out by anyone with sufficient assets to cover the costs of the loan and a viable exit strategy.
If in doubt, consult with your broker for more detailed information on the pros and cons of the two options. Independent broker support will also help ensure you get a competitive deal however you choose to fund your property development or construction project.