The property market is ever-expanding and so are the financial options available. Understanding the vast range of finance available is crucial for serious investors and developers, but it can be difficult with so many options to choose from. Development finance could be an option to consider, especially for those involved in large developments or renovation projects.
Our specialist advisors speak to many experienced developers who still find development finance to be confusing. So don’t worry, we’ve written this guide to explain development finance in detail. Our advisors are also available to guide you through any questions that you may have. You can start an enquiry at any time and a specialist advisor will call you to explain the options available to you.Enquire Now
What is development finance?
Development finance is a type of loan used to fund large property ventures such as developments, conversions, renovations and even regeneration projects. Think of big property ventures such as constructing entire apartment blocks or developing multiple properties on a large piece of land.
Development finance can’t be used for smaller property projects such as single home refurbishments and ‘flipping’ property. For smaller projects such as these, bridging loans or refurbishment finance would be better suited. If your aim is to build your own home, then you would need a self-build mortgage as opposed to development finance.
An example of development finance is explained below:
A developer has agreed on a purchase price for a plot of land and aims to build multiple properties. The land will cost £150,000 and the projected build cost will be £600,000. The developer may then 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 developer = £300,000
Using this example, the developer has used £300,000 of their own funds. The loan of £450,000 can allow the developer freedom to use their own funds for other projects or as a safety net for the project, in the case of unexpected costs.
When will I need to pay the loan back?
Development loans usually need to be paid back between 6 months to 2 years. The duration of the loan is based on the scale and nature of the development. The longer it takes to repay the loan, will of course result in higher interest being charged, as it will be charged on a monthly basis. Interest is usually rolled up and repaid at the end of the term. Developers are able to do this, either by selling their development or remortgaging to a general mortgage product.
Development finance rates
Like traditional mortgages, development finance doesn’t have set rates. Approximate rates usually start from 5-6% a month.
Development finance brokers are typically utilised to put your application forward to lenders to find the right match and negotiate the best deal. Although there are a number of lenders advertising approximate rates online via calculators and tables, they’re normally estimated rates. Development finance is assessed on a case by case basis as there’s usually a lot of money involved. Financial lenders will base their loan rates on the proposition and the financial credibility of the borrower.
That’s why an experienced advisor is pivotal in ensuring that firstly your proposition is structured in the best way possible and secondly the rates secured are negotiated down to the best 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 simply the value of what the property will be worth at the end of the project. Lenders will generally lend up to 60-70% of the GDV and up to 75-80% of the total cost involved. On occasion, lenders may even 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 and there isn’t really a maximum. Our advisors have secured millions of pounds of finance for developers and continue to do so on a regular basis. See the example below:
A developer has 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). The funds will usually be released at intervals throughout the development.
100% development finance
100% finance loans are available, but only if the land is already owned outright by the developer. Lenders will assess the potential of the land and proposed build before a loan is agreed. Lenders will then secure the loan against assets or the land itself. 100% finance for development is assessed on a case by case basis and not every lender will entertain such deals, but they are possible.
Applying for development finance
Lenders want to see a secure and solid proposal. It is imperative to have all plans and financial forecasts for your proposal to present to lenders with clarity.
Lenders are obviously experienced in what types of projects they’ll lend on and will base their decisions on how much risk they’d be taking by approving the loan. Developers need to be able to demonstrate that the proposal has a strong basis to generate the forecasted profit.
Experienced developers may find it easier to secure finance, simply because they have a history of previous projects which can be presented to potential lenders. Nonetheless, if you’re new to developing, that doesn’t mean to say you won’t get finance, however lenders may probe further into your proposal and financial status.
Whether or not you’re a novice or a seasoned developer, experienced development brokers are always up to date with the latest changes, products and lenders available. Advisors can also add weight to your proposal as they know exactly what a lender will look for when assessing your loan application.
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 for a development loan (where applicable, depending on your project). Remember, plan well to minimise your own financial risk, not just the lenders.
- Purchase price of the property
- The purchase price of land
- Planning permission
- Building regulations
- Any previous experience (documented)
- Information of contractors (builders, architects, etc)
- Exit strategy (remortgage, sell, rent)
- Total build cost (detailed breakdown including materials, labour, etc)
- Gross development value (GDV)
- Contingency plan
- Single, joint or group venture?
- Potential yield of the project
- Duration of the project (including stages of development)
Development finance brokers
Our advisors specialise in development finance. Having an advisor on board can ensure your proposal meets the requirements of lenders. You can also be sure you’re getting the best deal that you’re eligible for. With such a large amount of finance involved, utilising the experience of an advisor is highly advised. Some lenders are only available via brokers, so you can be sure you’re not limiting yourself to only a few lenders, but can guarantee access to every lender available. You can make an enquiry with an advisor below.