Next Route Finance
  • Home
  • About Us
  • Services
  • Insights
  • FREE Route Report
  • Contact
July 16, 2021 by info@nextroutefinance.co.uk

The difference between a bridging loan and a development finance loan?

The difference between a bridging loan and a development finance loan?
July 16, 2021 by info@nextroutefinance.co.uk
Firstly, lets highlight the similarities in a bridging loan and a development finance loan – they are both secured against either land or property and they generally have similar terms (short term facilities). That’s about it!

It appears that more and more professional landlords are diving into the world of property development and by default requesting a bridging loan facility. Perhaps this is what they are more familiar with? Perhaps they have used one for an auction purchase, released equity for a short-term need or undertaken a small flip bought at BMV with a light refurb (under £20k) often classed as a ‘light refurb’ bridge.

Don’t get us wrong, there is certainly a need for bridging loans from a developer’s perspective too i.e. if you need to quickly release funds from a property for a deposit, perhaps buying land pre-planning or even the more recent term require a ‘developer exit loan’ (which essentially is a bridge) then yes, a bridging loan will be sought over a development loan.

But a bridging loan should not be confused with a development loan. The key differences are:
1) the security will be changed (are you adding value to the land or property)
2) experience (who will be undertaking the works)
3) loan metric (one is based on LTV and the other on GDV)

A bridging loan is very transactional, I need X for Y, over 12 months etc. Very straight forward with no material change to the land/property. The loan is provided in one upfront lump sum on completion and based on the current value of the asset (hence based on LTV).

With a development however you will be looking to ‘develop’ / change the security over the loan term. You will receive the loan in stages, in arrears, as and when each stage completes. The overall loan is therefore assessed based on GDV instead of LTV, as more value is added at each stage, the loan metric follows the GDV assessment.

You might be thinking, why include who’s doing the works if, on the smaller projects, the developer has the funds to support the works and purely requires £x to help contribute towards the purchase? Reason being, the developer is changing the lender’s security, so they will want to know who will be undertaking these changes. Always putting yourself in the lender’s shoes, even if you had the first charge security as part of the loan agreement, would you want an inexperienced individual changing the security? Albeit, the intention is to add value, the risks are greater; if something were to go wrong, this could result in more damage / rectification costs for the lender should they need to repossess.

A development will need to be planned, managed and effectively sold.

If you are an experienced builder for example, in the main, a lender would still class you as inexperienced in developments. Even though you have experience in building, you don’t necessarily have experience in taking a development from start to finish i.e. the responsibilities involved from purchase to sale. Your starting point would be quoting for the work and finishing with getting paid for the job undertaken.

Bridging is assessed much more on the asset / valuation, opposed to a development where the loan is equally, if not more, assessed on the applicant and team undertaking the works. You would rather support an experience good track record developer on a not so good project, opposed to a good project but inexperienced developer!

Aside from understanding how the development will be delivered i.e. via an established contractor under a JCT contract or via the developer themselves as the builder, employing sub-contractors – other factors need to be considered in the development process – the cost of construction, type/source of materials, risk of cost overruns, potential delays that may occur, what level of contingency has been provided, planning in place etc.

The complexity involved with development finance does not compare to that of a bridging facility and likewise, the formalities in the due diligence process, for all parties, is that much greater given the many factors involved with the development process. The key points to remember: are you changing / adding value to the security and are the people undertaking these changes experience – if the appraisal stacks up, there will always be solutions available to find.
Previous articleBuilders’ recovery hit by material shortages, says FMBNext article Heatwave risk from plans to convert shops to homes

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

About The Blog

This is targeted to anyone looking for regular new updates and education in relation to property development, finance and money!

Recent Posts

Capital Stack – what is it and how to build?August 12, 2021
Western Slopes: Wildlife Trust say no to housing development on ‘vital wildlife corridor’August 3, 2021
Heatwave risk from plans to convert shops to homesAugust 1, 2021

Categories

  • Bridging
  • Business
  • Commercial
  • Development Finance
  • Education
  • Environment
  • Finance
  • Lifestyle
  • News
  • Property
  • Property Development
  • Uncategorized

Tags

banking banks Brexit Bridging Capital Construction Covid Development Finance Digital Exits Finance Interest rates Marketing Money Property Property Developer Property Development Technology
Terms and Conditions

© Next Route Finance Limited 2021, all rights reserved. Next Route Finance Limited is a licenced credit broker and not a lender. Registered office is 11 Manor Corner, Manor Road, Paignton, Devon, TQ3 2JB. Trading address is Kingdom House, Brunel Road, Newton Abbot, Devon, TQ12 4PB. The company is registered in England and Wales (08256606). Next Route Finance Limited is directly authorised by the Financial Conduct Authority (734483). Next Route Finance is for business purposes only.

We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
Cookie SettingsAccept All
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checkbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
SAVE & ACCEPT