Residential Development Finance

Are you looking for development finance to help you bankroll a residential construction project? You’ve come to the right place!

Whether you’re an experienced investor who’s ready to apply for finance for residential development or a newcomer to the industry who wants to know what their options are, our guide to residential development finance in the UK has you covered.

What is residential development finance?

Residential development finance is a type of development finance loan that can be used to fund the construction of a residential scheme.

Like commercial development finance, the loan is offered on an interest-only basis over a short term, and the construction funds are released in staged drawdowns.

To qualify for residential development finance, the borrower needs to evidence an exit strategy in advance, which would usually involve selling the scheme or remortgaging.

How does residential development finance work?

Most lenders are willing to offer eligible borrowers 70-75% of the funds they need for the initial site acquisition and 100% of the development funds, released in staged drawdowns.

Providers often carry out a site inspection before each instalment is issued to ensure the project is on track. They charge a fee each time they attend the development.

At the end of the loan term, the lender expects the debt to be paid up in full, and the borrower usually settles it via the exit strategy they evidence in advance—this would usually be through the sale of the property or refinancing the debt onto a mortgage.

How do I get the best residential development finance rates?

Residential development finance is typically charged at a higher interest rate than mortgages (although you will only be charged interest on the funds you have drawn down), so you must end up with the most favourable deal available.

Development finance deals are usually offered case-by-case, but lenders tend to reserve their best rates for borrowers with the following…

• A strong exit strategy: You’re unlikely to be offered a development finance loan without a strong exit strategy. The more likely yours is to pay out without a hitch, the more likely the lender is to offer their most favourable rates. It helps if you have a principal mortgage deal with a residential lender.
• A healthy deposit/good security: Most lenders will offer 70-75% of the funds for the initial site purchase and 100% of the development funds, but if you’re able to put down additional deposit or put up extra security (usually another property), this can minimise the lender’s risk and help convince them to offer you a good deal.
• Industry experience: Most development finance lenders prefer borrowers with a strong track record in construction, and having one will usually help convince them that your plans are achievable. However, specialist lenders cater to first-time developers who can evidence a watertight exit strategy.
• Clean credit: There are specialist development finance lenders for customers with various types of adverse credit on their file (as long as it doesn’t put the exit at risk). However, having clean credit will usually help convince the lender that you’re low-risk.

Getting the best rates on a residential development finance loan requires meeting the above criteria as closely as possible and having access to the entire market.

By applying through a broker, all of the best deals you qualify for will be within reach – make an enquiry to speak with one over the phone and kickstart your application today.

Why should I use specialist residential development finance brokers?

This is important because finding the most favourable rates on the market can be difficult. Only a minority of development finance lenders offer these loans for residential purposes, as Financial Conduct Authority (FCA) permissions are hard to obtain in this sector.

The lenders that do provide these deals often attach caveats, such as a maximum term of 12 months (some lenders go up to three years for non-residential development finance loans), but a whole-of-market broker could help you find the deal you need.

Specialist development finance brokers can also offer you bespoke advice on your development project, outline all of your options and introduce you to the lender best positioned to offer you a favourable deal based on your needs and circumstances. Make an enquiry to speak with a whole-of-market broker over the phone today.

What is a residential land development loan?

This is simply a term some lenders might use interchangeably with ‘residential development finance’. Most development finance deals are for land the borrower wants to build on.

In some instances, the customer wants to buy an existing property to demolish and rebuild, in which case the lender will establish the value of the land without the property. However, the deal usually depends on the site’s gross development value.

Can I get residential development finance anywhere in the UK?

Deals are more straightforward to transact in England and Wales as more lenders operate there. Residential development finance may be possible in Scotland, although postcode restrictions exist in areas like the Highlands and anywhere off the mainland.

Residential development finance in Northern Ireland is also difficult to obtain because the choice of approachable lenders is slim.

The ones that do operate there may add caveats, such as higher interest rates and a capped loan-to-value ratio (LTV). Given that residential development finance is already a niche market, applying through a specialist broker is doubly important if your project is located in Scotland or Northern Ireland to give yourself the best chance of finding favourable rates.

What are the alternatives to residential development finance?

We often tell customers who want to know how to finance a residential development that development finance might not be their only option.

Possible alternatives include…

• A self-build mortgage: These work the same way as residential development finance but are geared specifically towards residential development. With this in mind, the interest rates you qualify for might be more favourable.
• Using equity from other properties: If you’re an experienced developer with a portfolio of properties to your name, refinancing them could release equity, and this capital could potentially be used to bankroll your next venture.
• Bridging loans: Many developers already have funds for their next project but not enough to bankroll. Bridging loans are another form of short-term, interest-only borrowing that requires an exit strategy. The main difference is that they don’t include staged development capital. A bridge loan could be used to cover the site purchase if you already have funds for the building work.

These are merely a handful of the alternative options you can discuss with your broker. There might be other courses of action that better fit a borrower in your shoes, so make an enquiry today to discuss them with a whole-of-market expert.

Speak to a residential development finance expert

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0330 818 7026 or make an enquiry online. Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.