Property development involves a lot of risk, so lenders often charge a high interest rate for development finance to balance that risk. It’s not unusual to be offered a rate in the double figures.
However, it can be possible to secure a more competitive deal. We’ll tell you about the factors that matter and how to influence them.
Here are the topics we’ll cover…
Typical interest rates for development finance
Development loan rates can vary significantly. To provide a rough idea, the typical rate for a loan above £500,000 would be around 3%-3.5% above the Bank of England base rate, below £500,000, it would be around 4%-4.5% above.
These interest rates are a lot higher than rates for residential mortgages or commercial mortgages. However, development loans are usually much shorter in term (usually under 3 years, compared to 25 years for mortgages), so the total amount of interest you pay, relative to the loan size, could be less.
You should also be aware that some development finance lenders advertise their annual interest rate (which will be around the figures stated above) but others advertise their monthly interest rate, which will appear a lot lower. For example, 6% per annum is 0.5% per month.
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Compare current rates
Without knowing some details of the size of loan you need, the project you’re financing, or your background, we can’t tell you what rate you’d be offered from a specific lender. However, we’ve put together the development finance comparison table below to help you understand where the range might begin.
|Lender type||Specific lenders||Possible rates||Project types|
|High street lenders||e.g. NatWest, Halifax, Lloyds, HSBC||2% + above the base rate||Experienced developers Straightforward projects Low loan-to-value Low loan-to-GDV|
|Property/development finance specialists||e.g. West One, Aldermore, Shawbrook, United Trust Bank||3.5+ above the base rate||Experienced developers Complex projects Any loan-to-value Any loan-to-GDV|
|Specialists who consider first-time developers||e.g. Nationwide Finance, Nucleus, Catalyst Property Finance||6%-7% above the base rate||First-time developers Low/med. loan-to-value Low/med. loan-to-GDV|
If you hope to secure an interest rate at the lowest levels (stated here), it would be sensible to work with a broker, who can help compare rates across the market and help with your application. Otherwise, you may pay much more.
How a broker can help you to get the best rate
A final factor that will contribute to the interest rate you’ll secure is the broker you work with. This is the factor you have the most control over. For example, if you don’t have a substantial deposit or you have no previous experience as a developer, these things are difficult to change. But a broker can help you to find the best high-LTV deal, or the best deal for first-time developers.
A broker will help you by comparing every deal that you’re eligible for, including those that you might not be able to find yourself, and working with you on your application to give you the best chance of success.
There are countless brokers out there, but their level of skill and experience varies. If you’d like to speak to a broker who’s been trained and vetted by us, get in touch.
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Factors that determine your rate
The interest rate for your loan could be significantly higher or lower than the typical rate, depending on factors including:
- Size of loan. Larger loans typically have lower rates than small loans.
- Type of financing. Bridging loans, mezzanine finance, and joint venture finance all have different typical rates.
- Deposit size. If you have a small commercial deposit, you’ll usually pay a higher interest rate.
- Development location. Not all lenders finance projects in all regions, so you may not be able to choose from the lowest rates.
- Gross development value (GDV). Projects with a high GDV will likely have a lower rate.
- Your experience. Many lenders will only consider applications from developers who have completed two or three successful projects. First-time developers will pay much higher rates.
- Your credit history. In some cases, you may be charged a higher rate if you have a poor credit history.
A developer with a large deposit and a good track record, credit history, and business plan should qualify for the best development finance rates.
Other costs and fees involved
Development finance costs are much higher than a typical mortgage. As well as the interest on the loan, you should be prepared the pay all or some of the following:
- Application fee. Some lenders charge an application fee of £1000-2000.
- Surveyor’s fee. You’ll need a surveyor to estimate the GDV of your project, which could cost £1000-2000.
- Solicitor’s fee. You’ll need a solicitor to manage the contracts and arrangement of the loan and will also need to cover the lender’s legal fees.
- Quantity surveyor’s fees. Your lender’s quantity surveyor will visit the site before the loan is approved and before each drawdown of capital. Fees vary.
- Arrangement fee. Most lenders charge around 2% of the total value of the loan to cover the administration of arranging it.
- Completion fee. Most lenders charge around 1% of the total value of the loan to cover the administration of closing it.
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