Bridging Finance or Building Finance?

Which is the best option to fund yourDevelopment?

A good number of clients who call to enquire about our lending products start the call asking for a bridging loan when looking to fund their latest building project.

In our opinion when undertaking a build a bridging loan is not the best option for a number of reasons. Firstly a bridge is generally lent in a lump sum. Doing this will cost interest based on the full amount required which will add to the overall cost of the facility. Even if a rate of interest quoted is lower than for a development loan, borrowing the full amount from day 1 will end up being more expensive.

Secondly, bridging lenders will normally lend based on the asset’s current value. With regard to a building plot the value is probably not going to be high enough to cover the cost of build. If a plot is, on average, worth 25-30% of the gross development value, and the lenders will heavily restrict their loan to value on land, it will likely leave a shortfall to be made up from a builder’s own resources. If you have to tie up your own funds in the build you are risking problems if there is an overspend on the project and could restrict your opportunity to buy the next site before you have completed the current project.

If a bridging lender is willing to release the loan in stages it will likely be small amounts and the next draw down will be based on the asset’s new value. We have seen cases where, because a site has not increased in value enough after spending a tranche of money, the next block of funding is not available leading to a site which is part built and not able to progress.

Better to use Building Finance.

Our Building Finance will be released in pre agreed stages, as and when required, to ensure a smooth build and funding process. Our rates are very competitive and often cheaper than other providers, this saving is further enhanced as you will only be paying interest based on the amount of money you have drawn down. So, for example if your project is to cost £150,000 to build you will only be paying, in the early stages, on much smaller amounts making Richmond Building Finance cheaper in comparison to a lump sum bridging loan.

We also understand that site values do not necessarily increase based on the amount spent on the site and so when releasing further tranches of money to you we do not take into account the valuation as we are focused on the Gross Development Value. This means that you can be sure the funding is available to complete the build and move onto your sale or buy to let mortgage.

Our Development loans will allow you to borrow the amounts you need, when you need it. This will make the overall cost of the loan cheaper than a lump sum bridging loan. Knowing we do not lend based on the current value of the site as the build progresses means you need not worry if your next tranche of funding will be available, so you can just get on with the work.

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