Property Development Finance
Are you a property developer?
We have access to brokers who are highly experienced in working with lenders to provide the finance you need, taking into account the challenges and complexities of each project.
In the UK, development finance is a highly flexible type of borrowing used to fund a wide variety of property-related projects.
This could include anything from simple conversions and renovations to complete refurbishments. A key advantage of this type of financing is that it offers developers and investors the opportunity to progress with their projects without needing access to significant capital of their own upfront.
In this guide we look at property development finance, how it works and where to get the best deals.
What is development finance?
Property development finance is a type of short-term loan that can be used to purchase land, construct or improve buildings, fund renovation and refitting costs, and provide a financial safety net during the development process. It is typically used by developers and investors for property projects, particularly when traditional mortgages are either insufficient or not available.
Development finance has higher borrowing costs than traditional types of financing, as lenders assume greater risk when providing these loans. Once the project has been completed, the loan is usually repaid through the sale of the property or refinanced to a longer term loan.
How does development finance work?
Funds for property development projects are typically released in stages, beginning with the initial release used to purchase the site or refinance any existing debts on it. Subsequent releases are usually contingent upon certain milestones being met and approved by the lender, who will check your progress against the timeline set out in the application. To ensure a smooth process, it is important that you remain as close to your schedule of works as possible, and inform your lender if any deviation occurs.
Typically, the property development finance application process can be completed in around 6 weeks; however, if you have a tight time frame, it might be possible to expedite it. Let your adviser know upfront if you need your application to be wrapped up urgently; with the right preparation and cooperation from all parties involved, your funds could be released earlier than usual.
Finance is usually only accessible for sites that have full planning permission in place.
To help ensure your application runs as smoothly and quickly as possible, it is important to submit it early and be prepared for any delays that could occur if new information arises. Your mortgage broker can assist you in preparing and submitting the application while waiting for planning permission to be granted.
Generally, most lenders will let you accumulate (roll-up) the interest payments during the loan term, to be paid when the loan is eventually repaid. Although there are some lenders that require you to make interest payments throughout the loan term, this is not very common.
Monthly payments of interest can be a possibility; however, it can add unnecessary complexity to the process, and it may prove challenging from a cash flow perspective. In addition, the lender would need to see evidence of sufficient income in order for them to approve this arrangement.
What are the different types of property development finance?
The right product for your project depends on its type and the level of works involved.
For ground-up builds, you’ll need property development finance, which can later be replaced with a cheaper option when the project is complete. For property conversions and large-scale restorations, you may use either property refurbishment finance or development finance for bigger, more complex schemes. Finally, property refurbishment finance is suitable for any kind of refurbishment work, including light work and major structural changes such as extensions or reroofing.
100% Development Finance enables developers to undertake projects without using their own cash. This type of financing, also known as Joint Venture Development Finance, requires the JV ‘partner’ to provide all of the money upfront in exchange for a share of the profits once the project is complete.
Is development finance the same as a bridging loan?
They are not the same but there’s a lot of similarities, particularly for smaller projects.
Property development loans are typically larger and longer-term, while bridging loans are shorter term. Property development loans are also used to fund large-scale building or construction projects, such as ground-up builds or major restorations. Bridging loans, on the other hand, are used for short-term financing needs such as buying a property before selling another. Bridging loans can also be used for light property refurbishment work, but not for new build projects and developments.
Different types of finance sometimes needs to be dovetailed together. You may start with pre-planning finance, which is a type of bridge loan, to purchase some land without planning permission. Once planning is granted the value of the plot goes up and you can now apply for development finance on the enhanced value, repaying the planning gain loan at the same time.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Who can apply?
Development loans are typically accessible to companies and individuals who own land with potential for development, including housing, commercial business, or industrial use. The borrower should have either a track record of experience in the sector, or be able to demonstrate clear financial capability in order to qualify for the loan. Lenders will also assess the viability of the project and may require additional security such as personal guarantees and collateral before providing a loan.
- Individuals
- Partnerships
- LLPs
- SPV companies
- Trading businesses
How is development finance repaid?
THE EXIT STRATEGY
A property development loan is a kind of bridging finance, typically with a short duration. When seeking such a loan, lenders will want to know the exit strategy – or how the loan will be paid back – and it’s important to have a well-thought out and realistic plan in mind.
An exit strategy is the plan you have in place to repay your property development loan. This must be convincing and realistic, as lenders will need assurance that it can be used to pay back the loan. At the end of the term, all fees and interest must also be taken into account when repaying the loan.
- Sale
- Exit finance
- Long term finance
Repayment of development finance loans generally occurs after the completion of the project. In some cases, it’s possible to refinance to a development exit loan before the properties are finished, allowing for a lower rate or the release of capital. Additionally, refinancing to a buy-to-let or commercial property mortgage is often used when properties are to be retained.
Combining different repayment methods can also be beneficial, such as when there are both off plan sales and properties which will be kept and leased.
Contact a specialist
Respect Mortgages works with one of the UK’s best known independent mortgage brokers. We can introduce you to one of their specialist development loan advisers who can arrange the finance you need.
