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Residential Development Finance

Looking for information about residential property development loans? Get the right advice here.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 25, 2021

We receive lots of enquiries from customers who are in the market for residential development finance and have helped many of them achieve their goals through this product type.

Whether you’re an experienced investor who’s ready to apply for finance for a 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 over a short term period on an interest only basis 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 be the sale of the scheme or a remortgage.

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 draw downs.

Providers often carry out a site inspection before each instalment is issued to make sure the project is on track, and will charge a fee each time they attend the development.

At the end of the loan term, the lender will expect the debt to be paid up in full and the borrower will usually settle 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 that you have drawn down) so it’s important that you end up with the most favourable deal available.

Development finance deals are usually offered on a case-by-case basis, 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. Obviously it helps if you have a deal in principle for a mortgage from 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, there are specialist lenders who cater for 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), but having clean credit will usually help convince the lender that you’re low risk.

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

By applying through a whole-of-market 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 attached 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.

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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 that the borrower wants to build on.

There may be instances where 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, although the deal would usually be based 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 to obtain in Scotland, although there are postcode restrictions in areas like the Highlands and anywhere off the mainland.

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

The ones which 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 sector of the 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 in much 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 set aside for their next project, but not quite enough to bankroll the entire thing. Bridging loans are another form of short-term, interest-only borrowing that require an exit strategy, the main difference being 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 are a better fit for 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 0808 189 2301 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.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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