Published 19th July 2018 · Updated 12th September 2023 by Martin Alexander
If you’re involved in large developments or renovation projects, development finance can be an option to consider.
Key features of the development finance products on offer are:
- Finance to develop new builds and conversions
- Single units and multi-unit projects
- Semi-commercial buildings
- Residential property
- Joint venture projects
- Land purchases included
- Finance for any level of experience
Key financial figures include:
- 85% loan to cost
- 65% loan to GDV
- Development loans from £25,000 to £100,000,000
What is development finance?
Development finance is a short-term finance option typically for residential and commercial property development, but can also be used for:
- Property conversions
- Renovations
- Regeneration projects
Development finance can’t be used for smaller property projects such as single home refurbishments.
How does development finance work?
For example, imagine you’ve agreed to buy a plot of land on which you aim to build multiple properties. The land costs £150,000, and the projected building cost is £600,000. Your lender allows you to use development finance to fund 60% of the plot of land and 60% of the build.
- Land purchase price = £150,000
- Projected build cost = £600,000
- Development finance = £90,000 for land and £360,000 for the build
- Funds needed from the developer = £300,000
Using this example, the development loan of £450,000 can allow you the freedom to use your funds for other projects or as a safety net for your existing project.
Can development finance be used for smaller projects?
For smaller projects, other options may be more suitable. A bridging loan can provide a quick burst of capital and is usually repaid just as fast. This is useful for situations where you need a short-term loan. Many investors use bridging for auction purchases. Homeowners can also use bridging finance if they’re in a chain and need to move out before selling their property.
Refurbishment finance is another option for smaller-scale property projects, such as refurbishing a property to resell it for a profit. The funds are largely used to spend on the refurbishment of a property.
You could apply for a self-build mortgage if you wish to develop your own home. Self-build mortgages are for personal projects, such as building your own home and not necessarily for investment. That being said, lenders must ensure your project is viable.
How long will I have to repay the development loan?
Development loans usually need to be repaid between six months to two years. The duration of the loan is based on the scale and nature of the development. The longer it takes to repay the loan, the more interest is charged. This is because the interest is typically charged on a monthly basis.
Interest is often rolled up and repaid at the end of the term. It’s common to repay the loan in full, either by selling the development or by taking out a mortgage.
What interest rates can I expect?
Interest rates are typically 5-7% per annum. For smaller projects, you may be charged monthly at rates between 1-1.5%. Although several lenders advertise rates online, they’re generally estimates. Rates are assessed on a case-by-case basis, as each development is unique and needs to be assessed accordingly.
Commercial lenders also base their loan rates on the proposition and the borrower’s credibility. That’s why an experienced broker can be crucial in ensuring you get the best deal offered. Brokers ensure your proposition is structured correctly and the deal is negotiated to the lowest possible rate.
How much can I borrow?
The amount you can borrow is based on the gross development value (GDV) of the finalised project. The GDV is the value of your development once it’s been built. Lenders typically offer up to 60-70% of the GDV and 75-80% of the total cost.
Occasionally, lenders will lend up to 100% of the total build cost if the total loan is lower than 60% of the GDV. Development finance typically starts from £250,000 with no maximum.
How is affordability calculated?
For example, imagine you’ve secured planning permission on a plot of land to build ten properties. The GDV is estimated at £5 million. The land costs £1 million, and the build costs are estimated at £2.5 million, resulting in a total cost of £3.5 million.
A lender may approve a loan of up to £2.6 million (75% of the total costs). Finance is then released at intervals throughout the development.
Is 100% development finance possible?
100% development finance is possible if you already own some land outright. Lenders will assess the value of your land and proposed build before a loan is agreed upon. Finance can then be secured against your assets or on the land itself.
Not every lender will consider a 100% development loan, but they are possible.
How to apply for a development loan
Lenders want to see a secure and solid proposal. It’s important to have plans and financial forecasts for your proposal ready so you can present lenders with a viable proposition.
Lenders are experienced in the developments they’ll lend on and will base their decisions on the risk they’d be taking by approving the loan. As a result, you’ll need to demonstrate that your proposal has a strong basis to generate your forecasted profit.
Experienced developers may find it easier to secure finance because they have a history of previous projects that can be presented to potential lenders. Nonetheless, if you’re new to property development, it doesn’t mean to say you won’t get finance. Lenders may simply probe further into your proposal and financial status during your assessment.
What should your proposal contain?
An advisor can help you with your application, and we’ve listed the key areas you’ll need to consider before applying. Remember, plan well to minimise your financial risk, not just the lenders.
Your development finance proposal should contain the following:
- Purchase price of the property and land
- Planning permission
- Building regulations
- Any previous experience (documented)
- Information on contractors (builders, architects, contractors)
- Exit strategy (remortgage, sell, rent)
- Total build cost (detailed breakdown including materials and labour)
- Gross development value (GDV)
- Contingency plan
- Single, joint or group venture?
- Potential yield of the project
- Duration of the project (including stages of development)
Specialist brokers for property development
Having an advisor can ensure your proposal meets the requirements of lenders. You can also be sure you’re getting the best deal you’re eligible for.
With such a large amount of finance involved, utilising an advisor’s experience is highly advised. Some lenders are only available through brokers, so you can be sure you’re not limiting yourself. Furthermore, you’ll have access to every lender available. Brokers can add to your proposal as they know exactly what a lender will look for when assessing your application.
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About the author
Martin Alexander
Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.