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Whether you’re ready to apply for a property development loan or need expert advice about these products, our guide on how to finance property development has you covered.
You’ll find the following topics covered below…
- What is development finance?
- Loan to values and deposits
- Eligibility criteria
- Term length
- How much can I borrow?
- Interest rates
- What other options are there?
- Peer to peer property development finance
- How to finance property development
- Speak to an expert
If you’re interested in property development finance and would like to speak to an expert about all the available options, call 0808 189 2301 or make an enquiry for a free, no obligation chat. We’ll match you with one of the expert brokers we work with, ensuring they have experience in helping people in similar circumstances.
All the experts we work with are whole-of-market mortgage brokers with access to lenders across the entire UK. They will use their expertise and knowledge to help you find the right finance solution for the best available price.
What is property development finance?
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Development finance is a term used to describe loans for property development, although it is a product category in its own right. These development loans are usually offered on a short term, interest only basis and there are a number of similarities to bridging finance.
One of the main things that sets property development loans apart from bridging is the way they are paid out. The capital is released in staged drawdowns as the project progresses, and most lenders carry out re-inspections of the site before issuing each instalment of capital, to make sure the schedule of work (SOW) is progressing as planned.
Development finance explained
Building development finance is most commonly used by property developers, builders and businesses to fund a development project, usually because they don’t have the full amount of funding needed to complete the works. These loans can be used to help cover building costs as well as the purchase price of the site itself, subject to lender criteria.
Development finance can be used to bankroll commercial, mixed-use or residential properties, projects of any size, although larger-scale undertakings are more common.
In order to get development finance loans in the UK, the borrower would need to evidence a viable exit strategy, i.e. a means of repaying the debt at the end of the term. This would usually be through a remortgage or the sale of the development post-completion.
What is the maximum loan to value and minimum deposit required?
If the development finance loan covers both the initial bridge for the purchase of the site and the developments costs, most lenders would offer a 70-75% loan to value (LTV) ratio for the purchase and 100% of the development costs, released in stages during the build.
Lenders who provide property development loans in the UK usually work out what they are willing to offer based on the project’s loan to gross development value (LTGDV) and cost (LTC), offsetting the current value of the security against the site’s post-development value.
It may be possible to get a development finance loan that covers 100% of the purchase cost if you’re able to put up extra security, such as properties or assets you own and hold equity in. Under these circumstances, some lenders might also request a profit share agreement.
Finance for the development of property is usually offered on a case-by-case basis by development finance providers. There are no hard and fast rules about eligibility and affordability that apply across the board, but lenders prefer borrowers with the following…
- A strong exit strategy:
In order to get a development finance loan, you will need to evidence a viable exit strategy in advance. This would usually be a remortgage or a sale of the development post-completion. The lender will need to be confident that your exit plan will generate enough capital to pay off the debt at the end of term.
- Experience in property:
Experience in property is not essential as there are lenders who cater for first-time developers, but a strong track record in the relevant industry will almost certainly help convince the provider that your plans are achievable. Some lenders might insist on experience if it’s a complex development project.
- Clean credit:
A spotless credit rating is not essential to secure finance for property development in the UK as most development finance lenders are unregulated and can therefore take a flexible stance to what they will and won’t accept. Although having bad credit is only really an issue if it puts the exit strategy at risk, clean credit will almost certainly help convince the provider that the deal is low risk.
- A healthy deposit/good security:
Although most development finance lenders will cap the loan to value (LTV) ratio at 70-75% for the purchase funds, putting down extra deposit or additional security can help lower any perceived risk.
When assessing loans for property development in the UK, development finance lenders will be keen to see that your plans are achievable, and they will determine that by taking a broad view of the case, looking into the factors listed above as well as other variables, such as the expertise of the team that will be handling the development work itself.
For more information about development finance eligibility and affordability, get in touch and the advisors we work with will talk you through it. They have whole-of-market access and can introduce you to the right lender if you choose to make an application.
How long are the terms?
Development finance loans are usually offered on a short-term basis and generally range between three months and three years. Lenders will likely tailor the repayment time frame to the nature of the project, making allowances for things like a sale/marketing or refinance period after the works are complete, so the exit strategy can be executed.
How much can I borrow?
Some lenders have no limit! The amount a development finance lender is willing to offer you will largely be based on the viability of the investment and the strength of the exit strategy.
Some lenders have a minimum loan amount of around £50,000 – you might struggle to find a provider who is willing to rubber stamp a development finance loan lower than that (though it’s by no means impossible). Indeed, there are lenders who will only offer their most favourable interest rates if the deal is worth between £500,000 and £750,000.
At the upper end of the scale, there is no set limit on how much a development finance lender will let you borrow, as long as you evidence a strong exit strategy that is likely to recoup that amount and cover the interest. Multi-million pound deals are not uncommon.
How to get the best rates
Interest rates on development finance deals are typically higher than mortgages, so it’s important that you find the best ones available to you.
In order to do this, you will need to meet the lender’s affordability requirements at as many development finance lenders as possible and have access to as many of these providers as possible.
Approaching lenders individually is not the best way to go about raising finance for property development, as making too many applications can have a negative impact on your credit file, not to mention the amount of legwork this would involve.
The best way to ensure you end up with favourable rates is to use a whole-of-market broker. That way, you will have access to all of the best deals you qualify for – so make an enquiry and the advisors we work with will introduce you to the right lender.
What else do I need to know about interest rates?
Before taking any loan for property development, it’s important to be aware of all of the costs that will be involved, so you should familiarise yourself with how interest is charged on development finance. The good news is that you will only be charged interest on the funds you have actually drawn down, and not the capital that’s due to be released at a later stage.
While this may come as a relief, borrowers should also be mindful of how much the lender will charge for any future site inspections, which are usually required ahead of each funding stage. There’s little point taking a low-interest deal if you’re paying excessive amounts here.
If you have any concerns about costs and interest rates, get in touch. The brokers we work with can provide you with the best property development finance tips and help you find the most affordable deals for a borrower with your needs and circumstances.
How to finance property development
Many of the customers who get in touch with us want to know how to finance a property development, and a development finance loan might not be the only option.
One alternative would be to refinance any commercial mortgages or asset finance agreements you already have. This can release equity (assuming you hold some in the property/asset in question), which can serve as capital to invest in a new property.
What other options are there for raising finance for property development?
Other potential alternatives to development finance include…
- Bridging finance
- Commercial loans
- Mezzanine finance
- Joint venture property
Using a bridging loan
Bridging finance has a number of similarities with development finance, but the main difference between these products is that payments are not staged with bridging.
Although there are circumstances where a bridging loan could serve as an alternative to development finance, the two products are occasionally used in conjunction with one another. Some borrowers use bridging to purchase a site that does not have planning permission in place, with a view to applying for development finance once it’s granted.
Since development finance includes funds for the construction itself, securing the site via bridging can be a more viable option, in case planning permission is difficult to obtain.
Bridge loans are a potential alternative to development finance if you have your own capital for the development works, but need funding quickly to purchase the site.
However, development finance would usually be chosen over a bridging loan if the project is large in scale (tens of thousands and up) or a ‘from-the-ground-up’ construction scheme.
While development finance is more commonly used for construction projects than commercial loans, there are scenarios where business loans might be a potential alternative.
If the borrower can afford the monthly repayments on a business loan and has the capital for the construction work itself, a commercial loan could be used to purchase the site. This form of lending could also be a fallback solution if the works are likely to take a long time – shopping centres and hotels, for example, can take a number of years to build.
Unsecured business loans are available for amounts of up to £25,000, so they could be a viable option to fund a development project if you need extra capital to supplement funds you already have, and would prefer to borrow on an unsecured basis.
Standard bank loans for property development could also provide an alternative to development finance, in the same way as commercial loans. For information about rates, and eligibility, make an enquiry and the advisors we work with will bring you up to speed.
Mezzanine finance is not a substitute for development finance per se, but it can serve as ‘top-up’ funding when used in conjunction with it, and this can be vital for large projects.
This form of borrowing is a middle ground between debt and equity finance, acting as a second charge facility that sits behind the first charge development finance loan.
Mezzanine finance loans usually start at £250,000 and go up to 75% of the loan to gross development value (LTGDV) and 90% of the cost (LTC), leaving 10% for the client to foot.
Joint venture development finance is an alternative way to take out a development finance loan with zero deposit, and the lender taking a profit share at the end.
A typical joint venture deal would see the provider offering 100% of the purchase price and build costs, charging interest at a higher rate, and claiming a profit share of between 40% and 50% at the end. It is common practice for the lender to set up a special purpose vehicle in both parties’ names and oversee the project’s ongoing development.
Are there peer-to-peer lenders?
Peer-to-peer lending does exist in the development finance sector, but only a small scale at present and some brokers are cautious when it comes to arranging these deals.
With this in mind, it’s always recommended that you seek specialist advice before pursuing a peer-to-peer development finance deal – make an enquiry for more information.
How to get a loan
First of all, you should decide whether you need to take out development finance to fund your venture – the advisors we work with can help you determine whether this is necessary, and can recommend alternative products if they are more suitable for you.
Speaking with a whole-of-market broker is also the best way to kickstart your application if you’re ready to proceed, as they can introduce you to the lender best positioned to offer you a favourable deal based on your needs and circumstances – so make an enquiry today.
Speak to a development finance expert
If you have questions and want to speak to an expert for the right advice, call 0808 189 2301 or make an enquiry and we’ll be in touch soon for an initial chat about your plans and requirements. Then we’ll get to work finding the most suitable advisor for your needs, who can offer bespoke advice every step of the way.
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