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When investing in property projects, choosing the right type of finance can significantly impact your profits and success. Two popular options for investors and developers are bridging loans and development finance. While both provide short-term funding, they are suitable for different scenarios and project types.
In this detailed guide, we’ll explore the differences between bridging loans and development finance, the advantages and disadvantages of each, and real-life examples to help you make an informed choice.
Bridging loans are short-term finance solutions, typically lasting between 3 to 18 months. They are ideal for quick property purchases, auction buys, or refurbishments before refinancing or resale.
Development finance is specifically designed to fund property construction, heavy refurbishment, or major conversion projects. Unlike bridging loans, funding is released in stages based on the progress of the development.
Example Scenario:
Sarah buys an auction property needing minor refurbishment. She uses a bridging loan to purchase and improve the property over three months before refinancing onto a traditional buy-to-let mortgage.
Example Scenario:
David is developing a block of five flats. Development finance allows him to access funds incrementally as each stage of the build—foundation, structure, roofing—is completed, optimising cash flow and reducing overall interest costs.
| Pros | Cons |
|---|---|
| Quick access to funds | Higher interest rates |
| Flexible, simple criteria | Interest on total amount from day one |
| Ideal for auctions and refurbishments | Short repayment windows (pressure to refinance quickly) |
Pros | Cons |
|---|---|
Lower overall interest costs (interest calculated on drawn amounts) | More complex application process |
Supports large-scale projects | Stage payments can delay project speed if milestones aren’t met |
Higher borrowing potential | Requires detailed project plans and professional assessments |
Let’s compare bridging and development finance using a real-world scenario:
Project: Converting an office building into six residential flats.
|
Factor |
Bridging Loan |
Development Finance |
|---|---|---|
|
Total Loan Amount |
£500,000 |
£500,000 |
|
Interest Rate |
0.75% per month |
7% per annum |
|
Term Length |
12 months |
18 months |
|
Interest Calculation |
Interest charged from day 1 on full loan |
Interest charged only on drawn-down funds |
|
Funds Release |
Single lump sum upfront |
Released in stages upon inspections |
|
Suitability |
Less suitable due to high upfront interest |
Ideal, reducing overall costs & improving cash flow |
In this scenario, development finance offers a clear financial advantage due to staged funding, reducing interest payments.
Project Complexity: Bridging loans for simplicity and speed, development finance for staged, complex projects.
Cost Management: Development finance can reduce overall interest costs.
Project Duration: Short projects align with bridging loans, longer developments suit development finance.
Flexibility vs. Structure: Bridging loans offer flexibility; development finance provides structured funding tied to milestones.
A: While possible, it’s usually not ideal due to fees and refinancing costs. Choosing the right finance at the outset saves time and money.
A: Typically, yes. Most lenders request personal guarantees from company directors or individuals involved.
Not sure which type of finance suits your project best? At Auction Finance, our expert advisors can guide you towards the best solution based on your unique needs, timeline, and project scope.
(C) 2025 Auction Finance is a trading name of Mortgage Knight Ltd